The case of investing in Vietnamese Equity

Here are some reasons why to invest in Vietnam.

Vietnam is a great place to invest for investors from all over the world and there is no better asset class than equities to create wealth. This makes Vietnamese stocks one of the best asset you can think of. Centuries ago, the World economic center used to be in Asia. Many economists believe that the world’s economic center is nowadays shifting back to Asia and that China’s economy will surpass the US one within the next decades. Of course, Vietnam is not China. Vietnam is a much smaller country and is currently far poorer too. Nonetheless, Vietnam has a strategic position in Asia. It is next to China and shares many of the Chinese strengths. The total population of the country is roughly 93 million people and is expected to reach 100 million by 2025. The Vietnamese population is young and well educated and English is more and more spoken too. There is close to 50 million Vietnamese internet users. On the political side, Vietnam is officially a one-party communist country. However, the country has received a large portion of the elements of business sector economies. The country’s middle class is growing fast and is expected to double by 2026. The country is one of the World’s fastest growing economies.  The Vietnamese market has been developing at an overwhelming pace since the country became an associate of the World Trade Organization in 2007. Vietnam’s development record over the past 30 years is remarkable. Economic and political reforms under Đổi Mới, launched in 1986, have spurred rapid economic growth and development and transformed Vietnam from one of the world’s poorest nations to a lower middle-income country. Vietnam is now an open economy with a trading flow of US$340 billion, 1.6 times its GDP, and has attracted total registered foreign direct investment (FDI) of US$300 billion in 2016. The picture is not all rosy. The political and financial system risks are still present. Despite all the recent successful reforms, the country still suffers from slow bureaucracy, a certain level of corruption and a lack of transparency. When doing business in Vietnam, having a strong local partner remains a key aspect. Despite all these challenges, the potential of Vietnam is gigantic. A report from PricewaterhouseCoopers shows that the South Asian country has a potential growth rate of almost 10% per annum in real dollar terms. If these projections materialize, this could push the country up to around 70% of the size of the UK economy by 2050 versus less than 8% as of today. According to the same report from PricewaterhouseCoopers, Vietnam could continue to experience a very high rate of growth by growing at 5% or more per annum on average between now and 2050. Vietnam is aspiring to become a modern, industrialized economy and manage to move from a middle to a high-income status within the next five to ten years. Some views GDP growth as a major reason for superior stock returns in Vietnam. However, it has been shown that the performances of stock markets can be explained in part by the economic growth of the country but that it was only one of the factors that can explain that. Indeed, dividend yield explains a much higher proportion of returns (18% versus 5%) than GDP growth. As a matter of fact, dividend yields in Vietnam are extremely high. The risk in an emerging market can, in fact, be counterbalanced by a high dividend yield.

How the Vietnamese stock markets work

The State Securities Commission which is the regulator of the securities market was established in 1997. The State Securities Commission licenses securities businesses, approves public offers of securities and takeovers, oversees management of the markets and market players and investigates breaches of, and enforces the securities laws. The operations of the Ho Chi Minh City Stock Exchange started in July 2000 while Hanoi Stock Exchange opened five years later in March 2005. The operations of the Vietnam securities depository center launched in May 2006. In terms of trading, trading is available every weekday from 9h00 to 14h45. The daily price limits are set at ± 7% for HOSE and at ± 10% for HNX. There are four types of order: which are “at the opening”, “at the closing”, “limit order” and “market order”. As mentioned earlier, the two Vietnamese exchanges are not fully self-regulated and are under the supervision of both The State Securities Commission and the Ministry of Finance. Margin trading is available in both markets while short selling is not. The HSX exchange is the exchange home of large corporations while the HNX is home to smaller companies stocks. In addition to HNX and HSX, there is also a specific market recently established for unlisted public companies which is called the UPCoM.

Strengths and weaknesses of the Vietnamese equity market

The strengths of the Vietnamese stock markets are quite well known by now and Vietnamese stock markets offer plenty of opportunities to investors whether Vietnamese or international ones. The Vietnamese economy is booming and the stock market is still relatively small compared to its neighbor. There is plenty of space to grow and many new companies are expected to enter the stock markets shortly. However, there are still weaknesses, even though they could be fixed shortly. The Vietnamese stock markets are still small, which represents an opportunity for investors but this limited size also create difficulties for investors. Liquidity is far from being optimal, quality financial information is difficult to obtain and Exchange Traded Fund (ETF) specialized in Vietnam have had weak performance over the last years. In fact, it turns out that using ETF to invest in the Vietnamese stock market is not the right option for any investor wishing to maximize his/her gains.

How international investors invest in Vietnam stocks

There is a sharp increase in interests of non-Vietnamese investors. Non-Vietnamese individual investors have different priorities and concerns than Vietnamese ones. Vietnamese and non-Vietnamese investors also trade differently. Non-Vietnamese individual investors (including Asian non-Vietnamese investors) tend to be long-term oriented and tend to trade less often than their Vietnamese counterparts. A couple of years ago very few non-Vietnamese investors were interested in the country’s stock markets but we now receive a lot of questions and requests from a multitude of different countries.  One way to see this rise in interest from international investors is to look at the statistics regarding trading codes. In fact, in order to be able to start buying stocks in Vietnam, any investor needs a trading code and statistics are available to see how many are issued every month or quarter. These numbers have clearly shown an increasing trend over the last couple of years. Most of the codes are issued for individual investors while a roughly 1 in 8 are issued for institutional investors. Investors are attracted by a cleaner bank system and many of them know the country (some of the non-Vietnamese investors are of Vietnamese origins) and visit it frequently and are amazed by the county’s economic development.  The Vietnamese stock market is expected by most analysts to be upgraded to emerging market status in late 2019 or early 2020. “We expect that this upgrade will be associated with an increase in visibility at the international level.” Vietnam also recently launched a derivatives market in order to boost liquidity. This new market will help attract more foreign investors and the institutional investors are the ones targeted by this launch. Liquidity is also expected to be boosted by the new market. Only ten years ago, there were two listed stock exchanges with roughly 190 listed companies.  None of these companies but one has a market capitalization above 1 billion USD.  Today, the picture is very different with more than 700 listed companies. Among these 700 companies, 24 have a market capitalization above 1 billion USD. We can safely say that we have come a long way. The State Securities Commission of Vietnam plans to launch more products in the future, including covered warrants and other derivative securities. The consequences of all these changes are that many new companies are expected to ask to be listed. The Ministry of Finance is also working on to the current Securities Law in order to amend it in the next future. The objective of the Ministry of Finance is to “further improve the legal framework for the general market, promote shares and bonds and regulate the newly opened derivative market”. Finally, there is also a major plan for merging Hanoi Stock Exchange and the HCM Stock Exchange. The main objective of the merger is to improve transparency and attract more foreign investors. The merger is also expected to reduce costs for investors regardless if they are institutional or individual investors.