On Sept. 26, the Financial Times Stock Exchange released its annual country classification review, in which "Vietnam is currently classified as a Frontier market and is being added to the Watch List for possible reclassification as Secondary Emerging."
In order to provide an opinion, we must first seek to understand. Thus, I have come up with six thought-provoking questions:
- Where is Vietnam?
- When can Vietnam officially join the FTSE and MSCI emerging markets?
- Why it is important for Vietnam to be an emerging market?
- How much money is invested in emerging compared to frontier markets?
- Who will invest when Vietnam joins the emerging markets?
- Which stocks are most attractive for this reclassification?
The process of transitioning from a frontier to an emerging market is not as simple as going from first to second grade, but more like from elementary school to secondary school. It is getting very personal for me when it comes to country classification. When I joined the industry more than 10 years ago, my former boss kept saying that "to be included in the frontier market is important for Vietnam and the global fund for tracking our stock market."
Table 1: FTSE country classifications (as of September 2018)
Source: FTSE
1) Where is Vietnam?
Vietnam in brief. I have been writing about Vietnam on SeekingAlpha.com for several years now and it seems that I am one of the very few contributors from the Asian country. There are summaries of everything you need to know about Vietnam’s economy and stock market.
Geography and demographics. Located in Southeast Asia, Vietnam is a small and beautiful country with over 16 million foreign tourists each year. The country has roughly 96.6 million people (ranked 15th) and the median age is 29.2 years old (China is 36.7, Japan 46.1). Most people are considered working age (55%) and there is a high literacy rate of 97%.
Macro economy. Vietnam has a gross domestic product of $240 billion (ranked 46th, just above Portugal and the Czech Republic). It is one of the fastest-growing economies with a 6.8% increase in GDP last year alone. The country is a foreign direct investment destination and heavily reliant on import and export-oriented industries. Last year, Vietnam attracted $17.5 billion of foreign direct investment and has signed 17 free trade agreements. The country's total import and export reached $425 billion, nearly doubling the GDP which now benefits from the China+1 trend and trader war tension. If you ever wondered what kind of products Vietnam typically exports, just look at your clothes, shoes and cell phones.
Table 2: Vietnam macro indicators
Source: BSC
Stock market. The Vietnamese stock market is still waiting to mature, much like teenagers waiting for their 18th birthday.
The total market capitalization is around $183 billion (approximately 80% GDP) for equity and $40 billion for bonds. Daily liquidity of the Vietnamese stock market is currently standing at $250 million for equity, $350 million for futures and $400 million for bonds. Valuation is not cheap compared to peers; the price-earnings ratio stands at 18.3 times, the price-book ratio at 2.8 times and earnings growth is still very attractive (first-half earning grew 29% year over year). The main index - Vnindex - has outperformed the MSCI Frontier index, MSCI Emerging index and MSCI World index since 2016.
Graph 1: Vietnam vs. MSCI Frontier, Emerging and World indexes
Source: Bloomberg
2) When can Vietnam officially join the FTSE and MSCI emerging markets?
It may take at least two years for Vietnam to be officially promoted to FTSE Secondary Emerging.
Vietnam fulfills section 9/21 criteria of the FTSE assessment for secondary emerging and is qualified to be on the watch list. The official upgrade could be in one to two years. As an example, Qatar was added to the wait list in 2013 and was officially upgraded in 2015. Romania, however, was added in 2016 and will be waiting until March 2019.
You can find all the FTSE and MSCI reclassification cases here.
Graph 2: FTSE quality of markets criteria as of September 2018
Source: FTSE
The deputy prime minister said Vietnam will try to be reclassified as an emerging market in the next two years. The country's stock market has been improving over the last two to three years. In 2015, Vietnam’s prime minister signed a decree that allows foreign ownership to increase up to 100% in most sectors and companies can propose their own limits (changed from the fixed foreign ownership limitation of 49% for public companies and 30% for banks). Additional improvements include clearing and settlement changes from T+3 to T+2 in 2016 and derivative market index futures in 2017 and bond futures, covered warrant in 2018-19.
The FTSE added Vietnam to the waiting list, what about MSCI? In June, the MSCI reviewed Vietnam. The only change was the status of investor registration and account set up, which was not enough to consider the country for potential reclassification. But after Vietnam joins the FTSE secondary emerging market, the MSCI emerging reclassification will be feasible in the near future.
3) Why it is important for Vietnam to be an emerging market?
"It's not about the destination; it's about the journey." -Norma Jean Jurado
Even when Vietnam was classified as a frontier market, it attracted more foreign flow than most other frontier markets, even with a higher valuation. By the way, Vietnam is already the bluest of all frontier markets (around 19.8% in MSCI frontier 100 index, can be raised to 28% after Argentina and Kuwait join the emerging; and now counted for 20.1% in FTSE frontier 50 index).
Graph 3: Price-earnings ratio of VNindex and HNindex compared to other Asian index as of Oct. 1
Source: Bloomberg, BSC Research
The Vietnamese market has been improving its policies, including trading, depository, clearing and derivatives, something market participants would all benefit from. In 2018, Vietnam is the only country in Asia to have capital inflow despite strong headwinds. The stock markert’s upgrade could be an important motivation for economic growth. People in Vietnam are longing for a second "Doi Moi" period (“Doi moi” is the economic reforms initiated in Vietnam in 1986, which modernized the country).
Table 3: Foreigners invest in stock in Asia and emerging markets 2018 (Million USD)
Source: Bloomberg, BSC Research
4) How much money is invested in emerging compared to frontier markets?
Short answer: roughly 30 times bigger.
Needless to say, the frontier market is much riskier and smaller compared to the emerging market.
An example: the only "big" exchange-traded fund for Frontier is the Ishares MSCI frontier, whose total assets under management total just $515 million. At the same time, the top three emerging ETFs, MSCI ishares and the FTSE Vanguard, manage $138 billion. Some say the MSCI has 85% of the total market share, but our findings show there is not much difference. It is more like a 30:70 situation. In terms of total assets under management, the ETF tracking FTSE's emerging index is not falling too far from those who track the MSCI Emerging index ($68 billion compared to $82 billion).
Table 4: Total assets managed by top ETF-tracking emerging and frontier benchmark (FTSE vs. MSCI)
Source: ETF Database: The Original & Comprehensive Guide to ETFs
5) Who will invest when Vietnam joins the emerging markets?
Short answer: ETFs and much bigger mutual funds.
Around three ETFs are currently invested in Vietnam, including the iShare Frontier ETF, FTSE Vietnam ETF and Vaneck Vietnam ETF. There are only three assest management companies that have invested more than $1 billion in Vietnamese companies. They are Dragon Capital, Fides Investment and KIMC. There are only approximately 400 funds tracking Vietnam compared to nearly 840,000 funds globally.
While most people today only care about ETFs, they are not the only players. Their assets account for around less than 15% compared to the total stock investors globally. There are over 4,000 fund benchmarks to the emerging index (mostly the indexes which are provided by MSCI or FTSE). Anyway, the market could be much bigger than our estimates.
Graph 4: Number of ETFs and total assets tracking FTSE and MSCI
Source: Bloomberg
6) Which stocks are most attractive for this reclassification?
Short answer: The ones with a large market cap, float and liquidity.
Vietnamese stocks will attract an inflow from mutual funds and ETFs that are tracking the FTSE. If Vietnam can be 1-1.3% of the FTSE Emerging index (similar to the Philippines), we could see around well over $1 billion of inflow. Furthermore, the key stocks would include VanEck Vectors Vietnam (ARCA:VNM, Financial), Vinhomes JSC (STC:VHM, Financial), Vingroup JSC (STC:VIC, Financial), Bank for Foreign Trade of Vietnam (STC:VCB, Financial), Hoaphat Group (STC:HPG) and Vincom Retail JSC (STC:VRE, Financial), among others.
Table 4: Top stocks in Vietnam market as of Oct. 1
Source: BSC
Conclusion
Vietnam will likely have to wait several more years before being included in the FTSE emerging markets list. This means Vietnamese markets will be so much more interesting in the future. We might see more global brokers cover Vietnam and more global investors start investing in the Asian country's stock market. Sooner or later, you might suddenly find that not only products in your home have a "Made in Vietnam" tag, but also Vietnamese stocks in your mutual fund holding list.
As a result, it is time to take a closer look at this vibrant and exciting country and its stock market.
There’s no time like the present, so if you don't want to miss the train, climb aboard.
