FTSE decision looms for Vietnam after record-setting rally

[HANOI] Vietnam is on the cusp of achieving its longtime goal of being upgraded to emerging-market status by FTSE Russell, though the milestone may do little to further bolster this year’s blistering stock rally.

The South-east Asian nation is closing in on meeting the criteria for an upgrade from a frontier market, thanks to changes made to improve investor access and reduce foreign ownership limits. The index provider, which has had Vietnam on its potential upgrade watchlist since 2018, is set to make its next decision after the US market close on Tuesday (Oct 7).

Vietnam’s benchmark VN Index has surged 30 per cent this year to fresh highs, triple that of the regional benchmark, driven by strong economic growth and hopes for the upgrade. Despite record foreign outflows in August, retail traders powered the market to its best month in more than five years.

“Vietnam’s outperformance this year has been eye-catching, especially when compared to the more moderate rise in other markets around the time they were upgraded to EM status by FTSE,” HSBC Holdings analysts led by Herald van der Linde, wrote in a note last month. “This suggests further upside after a FTSE upgrade might be limited.”

Ahead of the decision, investors are wondering whether the event would be an upside catalyst and if expectations for a flood of incoming capital would transpire in Vietnam’s US$341 billion stock market.

As at August, Vietnam held the largest weighting of 36 per cent in the FTSE Frontier Index. Moving into an emerging market index would mean competing with giants such as China, India and Taiwan.

“After the inclusion is done and widely anticipated inflows have arrived, some investors, especially hedge funds, might take profits,” according to a recent Dragon Capital report. In the case of Kuwait in 2020, “there was sustained strength into the MSCI inclusion, but once completed, the market faced other headwinds”.

Kuwait holds less than 1 per cent weighting in the FTSE Emerging Markets Index.

Stepping stone

There are longer-term benefits to being labelled an emerging market, of course. It opens Vietnam to a broader pool of investors with wider mandates. And investors argue that opening up the country to more foreign participation would deepen the country’s liquidity.

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“An upgrade would signal that Vietnam has successfully addressed long-standing market access issues and is now recognised as an investable market by global institutional investors,” said Marco Martinelli, a partner at Turicum Investment Management.

FTSE predicted an upgrade could add up to US$6 billion in redirected foreign inflows. HSBC, meanwhile, projected US$3.4 billion of inflows, especially given 38 per cent of Asia funds and 30 per cent of global emerging market funds already hold Vietnamese stocks. Actual inflows would be smaller and staggered, it added.

“An upgrade itself does not immediately translate into large inflows,” said Tran Thanh Long, head of research at BIDV Securities. Passive funds may start with modest allocations while active Asian funds, many of which already hold some local stocks, could take time to adjust positions, he said.

The market is certainly not holding its breath for now. Market participants say that even if the event does not transpire this week, it’s only a matter of time. Strong earnings, ongoing reforms and political stability are seen as enough to keep stocks supported and sentiment intact.

Others are also playing the long game. Last month, Vietnam’s government laid out a plan to fully meet FTSE Russell’s criteria for upgrading this year and to reach emerging-market status by MSCI by 2030. The latter is widely seen as a more significant milestone, potentially unlocking even greater foreign inflows.

The FTSE upgrade could serve as a stepping stone towards MSCI inclusion, BSC’s Long added. “More importantly, it sends a signal that Vietnam is committed to financial market reforms in parallel with its strong economic growth story.” BLOOMBERG