Scrapping of foreign ownership cap unlikely to cause stampede in Vietnam stock market: analysts

By Ngan Anh, Thanh Nien News

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It is difficult to see a big increase in foreign buying as foreign ownership limits are still remained in some attractive sectors, including banking one. Photo: Diep Duc Minh It is difficult to see a big increase in foreign buying as foreign ownership limits are still remained in some attractive sectors, including banking one. Photo: Diep Duc Minh


The elimination of caps on foreign ownership in listed companies is considered a big-bang reform, but regulations that are complex and sometimes vague are holding back capital inflows into the market, industry insiders said.
A government decree that will take effect in September does away with the 49 percent foreign ownership limit in many listed firms. Some sectors will however continue to have restrictions.
Nguyen Tuan Anh, investment officer at VNDirect Security Company, said it is a very important decision, one that would help Vietnam integrate more actively and make its market become more accessible, competitive, and investor-friendly.
When the limit is scrapped, the market could see an increase in foreign buying, he said. Foreign investors would be able to buy shares of companies out of bounds now because the ceiling has been reached.
As of early last month there were 26 companies with a combined market capitalization of more than $10 billion, or 17 percent of the total market cap, in which the limit had been reached. They are among the best-run companies and include dairy firm Vinamilk, technology company FPT, Refrigeration Electrical Engineering Corporation (REE).
The prices of many of the companies have risen since late June when the government announced it would scrap the foreign ownership cap. Among them are REE and garment company Thanh Cong (TCG), which have gained 8.13 percent and 16.61 percent.
Blue chips are expected to be the choice of foreign investors since many other good firms are too small to make them viable investments for large institutional funds.
Vietnam has two bourses, the Ho Chi Minh Stock Exchange with a market cap of $50.3 billion and the smaller Hanoi Stock Exchange, with $6.5 billion. That compares with Indonesia's $345.7 billion, Thailand's $419 billion, and Singapore’s $558.1 billion. Singapore is the largest market in the region.
The new regulation could make Vietnam's market one of the region's most open and improve its stability, Andy Ho, chief investment officer of the Ho Chi Minh City-based VinaCapital, which manages around $1.4 billion in assets, said. Foreign ownership is mostly capped at 40 percent in the Philippines and 49 percent in Thailand.
The ownership limit has been a major obstacle to the development of the Vietnamese market and participation of foreign investors, whose daily trading is estimated at around $100 million.
But strong demand from foreign investors for attractive companies has created an alternative off-market system in Vietnam: foreign investors charge other overseas investors a premium of up to 15 percent for companies most in demand.
Almost all transactions in the market are by local investors who mostly buy equities on margins. This is thought to be the main reason for market volatility, Ho said.
The Vietnamese stock market is less attractive than others in Southeast Asia due to its low liquidity. The scrapping of the limit will encourage stronger participation by foreign investors, which in turn will help increase the liquidity.
In the longer term, the scrapping of the caps will help Vietnam win an upgrade from frontier to emerging market status in the influential MSCI index, which represents large and mid-cap equity performance across 23 developed markets.
The benchmark VN Index rallied 16 percent in the first 7 months of this year as the economy grew at the fastest quarterly pace since at least March 2013 and inflation slowed to 1 percent, from a peak of almost 28 percent in 2008, and the government made progress in tackling bad debts that had crippled the banking system.
Though the move has been hailed by investors, regulations remain complex and sometimes vague.
The new rules on foreign ownership will apply to sectors Vietnam has committed to open up in its international agreements, though it has not been specified which agreements.
A cap of 49 percent still applies in areas where conditions are stipulated for foreign investment. However, the government has yet to specify which companies or sectors will be excluded from this, aside from banks, where total foreign stakes are still limited to 30 percent. The issue could be a hurdle to foreign investment inflows into the market.
The remaining restrictions on some attractive sectors, including banking, is also an obstacle to inflows, Nguyen Hoang Hai, general secretary of the Vietnam Association of Financial Investors, said. “You are unlikely to see a rush of foreign buying when the new rules come into effect.”
Many foreign investors have waited to buy stakes in equitized state-owned enterprises (SOEs), but the equitization process has been too slow.
This year the government planned to equitize nearly 300 SOEs, but only 61 were in the first half.
Administrative procedures are also barriers to foreign investors, according to insiders. To trade, foreign funds need to be locally registered, which can take months, leaving many reliant on specialist funds already established in Vietnam or looking to gain exposure through indirect investment products such as exchange-traded funds.
The government should take more measures to further facilitate the participation of foreign investors, since overseas investment is a key to the stock market’s growth, economist Nguyen Tri Hieu said.
The government is targeting GDP growth of 6.2 percent this year, up from 5.98 percent in 2014.

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