On Sep 26, the FTSE, with its annual classification review, added Vietnam together with Argentina and Tanzania, to its watch list for a possible reclassification as a Secondary Emerging from a Frontier Market status. FTSE‘s stock market classification within its global equity indices consists of 4 levels: Developed, Advanced Emerging, Secondary Emerging, and Frontier.
Our take is that while this event is a clear positive indicator for the development of Vietnam’s stock market, it will likely be a long process. And the imminent impact will be rather muted. The reasons for our view are:
- In its Jun 2018 review, MSCI, another major index provider, disappointed Vietnams’ market participants by not including Vietnam in its watch list for a similar upgrade. The likely reasons were the still low foreign ownership limit, limited free float, and limited information available in English. On the positive side, market depth and liquidity are now sufficient to meet MSCI’s requirements
- China was only upgraded in this round of the FTSE classification review, from Frontier to Secondary Emerging. China has been in FTSE’s watch list for as far back as 2005 as we can trace. Although, circumstances have changed, and Vietnam may take a much shorter time from being on the watch list to actually becoming qualified as a Secondary Emerging market, it will unlikely happen fast
Near-term impact on the Vietnam stock market can be insignificant:
- The last anticipation of a potential inclusion into MSCI’s watch list for emerging market status has led to exaggerated volatility. And the market participants that got hurt during this event will be most likely hesitating to speculate again on a similar event.
–> It is reported that since late 2017 to early 2018, in anticipation of MSCI’s inclusion, many international EM fund managers had positioned themselves in Vietnamese stocks without really understanding the market and the company fundamentals. As a result, from April onwards, when there were headwind in international and emerging markets with subsequent redemptions in those funds, Vietnam was in the pole position to be reduced in the fund allocation
–> Market liquidity is still low (average of ~$220mn daily total volume for Vietnam’s 3 bourses)
–> Domestic investors, which still account for close to 90% of daily trading volume, show a strong herd behavior and gambler mentality, and they look at foreigners’ trading as a guideline for their own trading.
- The current general sentiment on emerging and frontier market is still on the negative side, even though our macro analysis indicates that Vietnam may even be on the beneficial side in the short term amidst the current hot trade tension.
We stick to our investment approach, which is bottom-up stock picking through the study of the companies’ business environment, prospects, and risks individually, rather than playing the market on a short-term basis.
Featured image credit: Getty Images
Source: FTSE Annual Review