WHEN WILL THE VIETNAM UPGRADE TO EMERGING MARKET STATUS OCCUR?

In this blog post, I thought I would examine this question above, which is one of the more common questions I hear global investors ask about the Vietnam stock market.

IS VIETNAM A FRONTIER OR AN EMERGING MARKET?

This is not a new question. For example I remember reading plenty of stories almost 5 years ago on this topic. Many were speculating that by the year 2020 Vietnam might already be upgraded to emerging market stock market status by the likes of global indices providers such as MSCI and FTSE.

To set the record straight though as we speak currently, Vietnam is considered a frontier stock market.

When writing about whether it is appropriate to judge Vietnam as a frontier or emerging stock market, it is useful to consider some of the key aspects the global investment community looks at when making such judgments.

In the next couple of subheadings, I shall break it down to aspects that firstly may make others consider it more of a frontier stock market. The second subheading will discuss the aspects that may take place over the next years that see it upgraded to an emerging stock market.

IS VIETNAM A FRONTIER MARKET?

A frontier stock market might tend to exhibit the following characteristics (Looking back historically this may have included Vietnam a decade or so ago, but things are changing and now Vietnam is rapidly moving away from such characteristics):

• Low market cap of the market compared to emerging stock market counterparts.
• Illiquid trading volumes.
• Weak corporate governance.
• Difficulty for foreign investors to access whether that be due to exclusions or other logistical barriers.
• Political instability.
• Unclear investment laws, lack of regulation, substandard financial reporting etc.

IS VIETNAM AN EMERGING MARKET?

Here are key aspects to monitor this year and the years ahead to lookout if an upgrade to emerging market status is imminent for Vietnam:

• Better developed and transparent laws on investment and the securities industry.
• Improvements in overall stock market IT infrastructure to enable tools such as short selling, derivatives etc.
• Stock exchange IT enhancements to help with increasing volumes in general, large and efficient settlements etc.
• More flexibility in the FOREX market.
• More companies to provide bilingual reporting to investors.
• Further consolidation of the trend of increased liquidity of the market in general.
• Further consolidation of the trend towards easing of foreign investor limits.
• A move from FTSE first, putting some pressure on MSCI to follow?

WHEN WILL THE VIETNAM STOCK MARKET GET UPGRADED TO EMERGING MARKET STATUS?

Lately I came across a story on the topic, one which stated the Vietnam stock market might have to wait until 2025 to be upgraded to emerging market status. That could be viewed as disappointing to those that read articles around 2018 stating an upgrade could occur around 2020!

Perhaps the pandemic was a blow to expecting all this to progress too quickly. Anyway, the Vietnam stock market is still on the right track. There is evidence of improvements and steps being taken for it to fill a lot of the criteria I just mentioned above that global investors are looking for.

We may only be a couple of years away from this big change. Some suggest FTSE could even act on this much quicker than that.

WHAT DOES AN UPGRADE TO EMERGING MARKET STATUS MEAN TO THE VIETNAM STOCK MARKET?

The pool of potential investors for emerging market stock exposure is much greater than that which are willing to invest in frontier stock markets. Many in this pool have embraced the idea of using ETFs based on well known market indices providers to obtain such exposures.

Therefore should the Vietnam stock market be upgraded to emerging market status we should see some major new source of global inflows, a potential big positive catalyst for the stock market.

I can now hear readers think to themselves, well this should be a relatively understood likely event in the future, wouldn’t it already be priced in?

Possibly.

However I would note that in recent years the trend of big inflows from global investors has been rather absent. This is a very different trend to the hot money that poured into the Vietnam stock market from offshore investors in the previous big boom around 2007.

I would also point out that should the Vietnam stock market gain inclusion in the emerging stock market indices, it will be a prominent component. That is because it is quite significant in terms of its overall market cap.

For some information, below is a recent snapshot of who makes up the current MSCI emerging stock market index:

Source: msci.com (data Feb 28, 2022)

With respecting the theory that markets are generally fairly efficient, I still believe that a future upgrade to Vietnam to emerging stock market status can act as a tailwind to prices going forward.

Although we might have to wait even until 2025 according to some to get such an upgrade from MSCI, the market might start to respond positively much earlier to snippets of news that comes out on this topic. This might occur even as earlier as this year.

ARE EMERGING STOCK MARKETS CHEAP IN 2022?

Late last year I discussed the debate on how emerging stock market valuations stacked up versus developed markets. You can read on my thoughts via the below link:

PROBLEMS WITH REOPENING STOCKS, EMERGING VS DEVELOPED MARKETS OUTLOOK 2022. – VIETNAM STOCK MARKET (vietnamesestockmarket.com)

SHOULD I INVEST IN THE VIETNAM STOCK MARKET IN 2022?

Let me know in the comments area if you think now is the time to get set in Vietnam stocks to gain exposure to this potential positive catalyst? Or perhaps it is far too early given some suggest this upgrade could still be a few years away?

Is Vietnam a good investment?

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