Incentives needed to lure investors off fence

During ten months of 2015, foreign investors bought VND4.8 trillion (US$213 million) on the Hanoi and Ho Chi Minh City stock exchanges, equalling 348.6 million shares. During August and September, foreign investors become aggregate sellers as concerns mounted over the possible US Federal Reserve rate hike and the yuan devaluation.

It is worth noting that foreign investors’ activities still account for less than 20% of the total trade volume in Vietnam, and the number of foreign trading accounts stands at 20,000. According to CEO of Dragon Capital, Dominic Scriven, foreign capital on the Vietnamese stock market remains a miniscule amount when compared to foreign direct investment (FDI) or remittances.

“When we go overseas, lots of investors talk about Vietnam but in reality, the number of foreigners opening a trading account here or buying Vietnamese firms is not high. Vietnam attracts billions of dollars in FDI and remittances every year, but foreign indirect investment is still very small”, said Scriven.

Overseas investors in Vietnam have attributed this reluctance to a number of factors.

Firstly, the 15-year-old Vietnamese stock market has a relatively small capitalization of US$52 billion, equivalent to 33% of GDP. The bond market, which takes up another 17%, is also undeveloped. The number of listed companies on both exchanges is 700, most of which belong to the small capitalization category.

“The market capitalization of Vietnamese firms is too small for large institutional investors overseas. For example, if a fund in Hong Kong has US$100 million, it is difficult for them to invest in Vietnam, because there’s a lack of diversity and good products. Recently, thanks to the easing of the foreign ownership limit and news of state divestment, many investors have become excited. However, they’re still waiting for further clarification on this matter”, chief investment officer of VinaCapital  Andy Ho told VIR.

Likewise, CEO of Vietnam Asset Management Thieu Thi Nhat Le complained about the lack of good opportunities on the Vietnamese stock market, which was tiny compared to its more developed regional peers.

Other hurdles, according to Le, include the slow process of equitizing state-owned enterprises (SOEs) and vague regulations.

“Though the government has made several efforts in pushing up equitisation and the divestment of the state’s stake in SOEs, the process has not been as effective as desired or expected.  Frequent changes and certain inconsistencies in the legal framework is another challenge,” Le added.

To lure foreign investors to Vietnam, experts noted that the market should offer better incentives and integrate into the global market. The greatest advantage that Vietnam currently has is a stable macro-economy, which is expected to grow by 6.5% this year.

“While other regional markets are slowing down, Vietnam is showing fresh signs of recovery after six years of difficulties. The  country also displays a strong determination to open itself to the world, via joining the Trans-pacific Partnership and other trade pacts. Thus, foreign investors once again want to believe in Vietnam’s potential”, said Scriven.

Scriven also emphasized improvements on the micro level, which include developing the stock market, equitizing SOEs, and easing the foreign ownership limit. He believed that if Vietnam sent a strong message through macro and micro changes, foreign investors would enter the country soon.

Meanwhile, Ho suggested that Vietnam should strive to upgrade its market status from a “frontier market” to an “emerging market”. he explained that this status is a prerequisite to attract overseas institutional investors like pension funds, who tend to have large capital for long-term investment.

“Many institutional investors only consider emerging markets due to their risk management rules. So it is important that Vietnam joins this list. The other step is pushing more SOEs to list on the stock exchanges, since it broadens the diversity, increases liquidity, and offers foreign investors more choices,” said Ho.

In the same vein, Le called for a transparent and effective process of SOE equitisation and state divestment. A wider range of products (such as derivatives, covered warrants, or non-voting stocks) should also be introduced to enhance the attractiveness of the market.