Until the recent global market turmoil, Vietnam’s economy and stock market were top regional and global performers. The country has long been the premier destination in Southeast Asia for FDI (accelerated thanks to US-China decoupling).And despite having frontier market status, Vietnam has a fairly liquid stock market. In fact and as of June 2022, 56 listed companies have a market cap greater than USD 1 billion.
When the COVID pandemic hit, lockdowns and supply chain bottlenecks dramatically impacted how much investment funds Vietnam’s export economy could absorb. Local investors opted to park their excess capital in the local stock markets rather than traditional safe havens such as gold or property.
This helped to offset foreign investor outflows during the pandemic and made Vietnam’s stock market the best 2021 performer in ASEAN and seventh best performing in the world, with the benchmark VN-Index up 35% year-on-year.The year 2021 was the third year in a row the VN-Index went up.In 2020 and 2019, VN-Index growth was 7.6% and 14.7%, respectively.
Vietnam is a promising economy that, irrespective of the derailing impacts of the COVID-19 pandemic, has gradually been recovering, and is likely to grow by 5.5% in 2022, according to World Bank estimates. While globally inflation is a major problem, Vietnam appears to have it “under control” for now.All these factors augurs well for the Vietnamese economy, which in turn will effect stock market growth positively, enabling it to remain one of the leading stock markets globally.
Understanding Vietnam’s Stock Market
Unique among frontier markets, Vietnam has two major stock exchanges and one minor one (that functions similar to the US’s OTC market) that are in the process of being reorganized. The Ho Chi Minh Stock Exchange (HoSE) and the smaller Hanoi Stock Exchange (HNX) have several hundred listed stocks, and the Unlisted Public Company Market (UPCoM) has close to a thousand. However, UPCoM stocks are not allowed to trade on margin, tend to be lightly traded, and are subject to fewer disclosures and other obligations that HoSE and HNX-listed stocks are subject to.
In 2023, all Hanoi listed stocks will transfer to the HoSE (which will serve as Vietnam’s primary stock exchange). The HNX will continue to operate as Vietnam’s primary bond exchange and offer funds, derivatives, and other investment instruments or products. Then in 2025, the HoSE will start receiving shares of companies listed on the UPCoM.
Brokerage and Stock Market Reforms
Vietnam’s stock brokerages have simplified the account opening process in the last two years. Local investors can now open brokerage accounts online without visiting a brokerage firm’s office. It takes just minutes for an investor to open a new investment account and sign in digitally on smartphone apps to have it approved. In addition, many brokerages have partnered with banks – meaning a new bank customer usually gets a new stock brokerage account too.
Thanks to these reforms, and as of mid-2022, there are 5.65 million stock accounts in Vietnam – meaning approximately 5.7% of the population has one brokerage account. However, many of these accounts are ghost accounts waiting to be activated, funded, or have transactions, while some local traders reportedly have multiple accounts to leverage access to brokerage research. The large influx of new investors who do trade has sometimes overloaded the existing stock trading system – causing crashes and slower market executions.
Fortunately, these issues are getting addressed as part of a much greater effort to upgrade Vietnam’s index status from a frontier to an emerging market before 2025. This designation upgrade will be a driver for foreign investment inflows as currently, only USD 95 billion can be allocated by investment funds to a country holding frontier market status, but USD 6.8 trillion can be allocated to an emerging market.
However, achieving an emerging market designation is not an easy process. Vietnam’s Ministry of Finance is working closely with index providers MSCI and FTSE Russell to update them with new information and to finalize the legal frameworks or address shortcomings in the local stock market.
The issuance of the Law on Securities in 2019, the revision of the Law on Investment and Business Law in 2020, and other reforms have already made several positive changes covering procedures for investing capital, access to information, the opening of new investor accounts, raising corporate governance capability, creating new financial instruments and encouraging product diversification.
In addition, these reforms have tackled ownership limits for foreign investors – a long time sticking point. While most publicly traded Vietnamese companies are still subject to foreign ownership limitations of 49% (or less), there is now a clear legal path for public companies to increase foreign ownership to 50% or above or remove foreign ownership restrictions entirely.
Finally, Vietnam’s government is working on new transaction systems and infrastructure to replace the overloaded existing ones. Shares will soon get transferred to investors’ accounts within the trading hours of T+2 (instead of T+3). In addition, a new settlement and clearing system under the Central Counterparty Party (CCP) model will remove the mandatory cash pre-funding requirement for buy trades. These upgrades will significantly improve liquidity, allow for new financial products to be created, and align Vietnam with international settlement practices.
Cracking Down on Stock Market Manipulation
In 2021, the State Securities Commission of Vietnam (SSC) issued more than 300 decisions to sanction administrative violations, the most common ones being: transactions not reported within the specified timeframe, the non-disclosure of information about planned transactions, and the non-disclosure of required information per the law.
In 2022, Vietnam’s Prime Minister ordered a harder and much wider crackdown with some high-profile arrests of Vietnamese brokerage and corporate executives for allegedly manipulating stock prices. Even the SSC chairman was sacked while the director general of the HoSE was expelled from the Communist Party.
The crackdown has hammered the country’s stock market in the short term. However, experts view this “housecleaning” as beneficial for investors over the longer term as it will create a more transparent stock market attractive to foreign investment funds.
Recommendations for Development ofVietnam’sStock Market
Generally, there are various measures and policies for developing a transparent stock market with minimal violations, effective management, and positive signals and profits that Vietnam could implement. The first one is perfecting the principles and legal frameworks for the stock market to operate synchronously with the international standards. This should be followed by strict consequences for violators of any kind to boost investor confidence about transparency, the safety of investment, and the potential for positive returns.
Second is the creation of a stock market with organizations that have robust financial strength and professional ethics since the efficiency and transparency of the market are subject to market makers’ activities. The participant requiresthe best solutions for improving the quality of theiractivities, which to an extent may require restructuring such as merger and acquisitions.
Third is developing the most effective mechanism of coordination for the administration of policies concerning the stock market to seal unhealthy activity loopholes. Among these policies include monetary policies,which have in the past worked to control the most critical financial situations either through their tightening or relaxation.
Last but not least is reducing direct intervention from the government as much as possible to create conditions of stocks operation according to the market rules and be responsible for own operations. There should be total separation of business and management functions to avoid any potential conflict of interest.However, this is not to mean that the government should lessen its intensity in inspecting and supervising operations of market partakers.
Conclusion
Moving forward, Vietnam’s efforts to reform and crack down on market manipulation bodes well for the economy and stock market. And with many local Vietnamese already having stock market accounts (even if currently inactivated or unfunded) or the ability to open or fund one in minutes, they can begin actively investing or trading at the first sign of another bull market. Vietnam being upgraded to emerging market status by the index gatekeepers at MSCI and FTSE Russell will allow a flood of foreign investment funds into the stock market. Though VN-Index has fallen 10% in 2022 (in line with the global markets), it is the right time to buy Vietnam stocks due to cheaper valuations and strong growth, according to Dragon Capital, a Vietnam-focused investment firm. Given the solid growth rate of Vietnam’s stock market and its strong fundamentals, Indian large investors looking to invest in foreign stock markets can invest in Vietnam’s stocks.
