VN30 provides a "better reflection'

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The Ho Chi Minh Stock Exchange (HOSE) last week launched the VN30 Index made up of 30 stocks with the highest market capitalization and liquidity.

The stocks represent about 80 percent of the total market cap and 60 percent of the market volume; no stock has a weight of more than 10 percent.

Pham Ngoc Bich, managing director of institutional sales at Saigon Securities Inc., Vietnam's largest brokerage, says the new index is a better reference tool and would enable easier derivatives trading.

Vietweek: HOSE said the VN30 is an improvement on the benchmark VN-Index. Do you agree?

Pham Ngoc Bich: We agree with HOSE that the VN30 is an improved equity index compared to the VN-Index. The new VN30 is constructed as a market cap-weighted stock index of the 30 HOSE listed companies with the largest market capitalization value, as adjusted for free float and liquidity.

On the other hand, the construction methodology of the VN-Index, which currently has some 300 constituent stocks, does not adjust the market capitalization of each of the constituent stocks of the VN-Index by each stock's free float and value liquidity.

Most international stock indexes are designed based the same construction methodology as the VN30 Index. Therefore, compared to the VN-Index, the new VN30 Index provides a better reflection of the investment opportunities and trading fluctuations.

One week may not be long enough to draw any conclusion. But can you tell us how investors have responded to the VN30 so far?

When the VN30 was initially announced, investors misunderstood the VN30 Index as they thought that it includes the best companies that are listed on the HOSE. After clarifications in the media by HOSE officials as well as some members of the HOSE Index Committee, it became clear that the VN30 Index is simply a basket of stock constituents.

The HOSE and most securities firms are quite satisfied with the response of investors to the launch of the new VN30 Index.

Can we see foreign funds adopt the new index any time soon?

The new VN30 Index has been designed exclusively for domestic Vietnamese investors, as the index does not eliminate the stocks that have no more room for foreign investors. The HOSE has announced that it plans to roll out soon another VN30 Index that would cater to foreign investors. Foreign investors, including portfolio managers who manage foreign-based investment funds that invest in Vietnam equities, would then be able to adopt [it] as an investment performance benchmark.

According to HOSE, VN30 can open the door for derivatives in future. How will this work?

We fully agree with HOSE that as the VN-Index consists of the 30 stocks with the largest market capitalization, the highest free float and most liquidity, individual baskets of the VN30 stocks could be easily traded on the HOSE. Therefore, some investment funds could design and launch listed ETFs (Exchange Traded Funds) that would be based on the VN30. Also the HOSE could then design and launch VN30 Index Futures and VN30 Index Options, which could be listed for trading on HOSE or on a separate board for derivatives on HOSE.

Based on the successful experience of ETFs on many international stock markets, the market for VN30 ETFs could be quite useful for investors who want easy access to the HOSE stock market through simple investment instruments.

Also, based on the successful experience in derivative products on many international stock markets, VN30 Futures and VN30 Options would be quite useful for hedgers in the management of risk exposure to Vietnamese stocks and/or to add value to their normal portfolio holdings of stocks listed on the HOSE.

What do you think about the government's plan to restructure the market?

The government has lined up several restructure programs this year for the securities market, the banking sector, and state-owned enterprises. The restructuring will take place amid a continued conservative monetary policy by the State Bank of Vietnam. Therefore, bank credits will continue to be quite limited for enterprises, which will not likely see any meaningful increase in average earnings.

Nevertheless, we forecast a decline in annual inflation from 18 percent in December 2011 to 12 percent or below by the end of 2012. The expected decline in inflation will leave room for the central bank to cut policy interest rates.

In that case, Vietnam's stock market could achieve at best a modest return of 10-20 percent in 2012.

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