At a VIR investment conference two weeks ago, Barry Weisblatt, research head at VNDirect Securities, shared his optimism about Vietnam’s efforts to draw in foreign funding, highlighting recent regulatory developments as a pivotal step.

Issues are systematically being erased to pave the way for Vietnam’s stock market upgrade, photo Le Toan

“Circular No.68/2024/TT-BTC, effective from November 2, is a key measure showcasing the Vietnamese government’s commitment to drawing foreign capital into its stock market,” Weisblatt said. “This circular reinforces Vietnam’s position as an appealing destination and could significantly enhance global investor interest. Directly, it may lead some regional and global emerging market funds to increase allocations to Vietnam by making investments more cost-effective.”

However, he pointed out that the more significant impact lies in its potential to improve Vietnam’s chances for an FTSE emerging market upgrade in 2025.

“An upgrade announcement could improve market sentiment and drive stronger retail investor activity,” he said. “If Vietnam secures this upgrade later in 2025 and its companies are added to emerging market indices, we could see significant capital inflows from exchange-traded funds. While estimates vary, I believe an inflow from $500 million to as much as $1 billion is realistic.”

Despite these developments, some experts believe Vietnam’s stock market potential remains underutilised. Dominic Scriven, chairman of Dragon Capital, noted the lack of major initial public offerings (IPOs) in recent years as a key factor holding back growth.

“Vietnamese businesses have yet to fully capitalise on the potential of the capital market,” he said. “Many companies desperately need capital but avoid seeking it through the market. Others aim to pull in strategic partners but bypass capital market mechanisms.”

The observation is supported by recent IPO activity. Data from Deloitte in November shows that the region recorded 122 IPOs in 2024, raising $3 billion - the lowest in nine years. Malaysia, Thailand, and Indonesia accounted for 90 per cent of the proceeds, leaving Vietnam far behind.

Vietnam’s only significant IPO in 2024 was DNSE Securities, raising $37 million. This underscores the broader issue: the capital market remains heavily skewed towards traditional sectors, offering limited opportunities for innovation-driven companies, Deloitte noted.

External factors, including high interest rates and geopolitical tensions, have also weighed on the IPO environment.

“The structure of Vietnam’s capital market remains heavily skewed towards traditional sectors like banking, real estate, and energy,” Scriven of Dragon Capital added. “This leaves little room for innovation-driven industries such as technology and e-commerce to grow. In Vietnam, companies must be profitable to list - a rule designed to protect investors but one that stifles innovation.”

Domestic investors face their own challenges. Institutions like life insurance companies and the Social Insurance Fund, which hold significant reserves, are largely restricted to low-yield government bonds.

“These institutions have substantial capital but lack the tools or freedom to deploy it into the broader market,” Scriven noted, further highlighting the limitations in market liquidity and growth potential.

“Looking ahead, we believe Vietnam’s capital market has the potential to rebound with targeted reforms,” Bui Van Trinh, partner at Deloitte Vietnam said. “The stock market is showing signs of recovery, supported by favourable macroeconomic conditions and lower interest rates. New regulations aimed at improving market transparency could bolster investor confidence as the country moves towards 2025.”

Weisblatt of VNDirect also believes that Vietnam’s credit rating will be a pivotal factor for its economic outlook.

“An upgrade to investment grade by Fitch or S&P could cut borrowing costs by up to 2 per cent,” he said. “While Vietnam’s fiscal fundamentals remain strong, addressing gaps in the banking sector is important. Minimum capital adequacy ratios are not yet Basel III-compliant, and recent issues at some underperforming banks underline the urgency of improvement.”

Looking ahead to 2025, the Lumen Vietnam Fund remains optimistic about the outlook for Vietnam’s stock market.

“The National Assembly’s sessions concluded with the approval of 18 laws and 21 resolutions aimed at driving growth. These include pilot plans for commercial housing projects and revisions to the Law on Real Estate Business, which are expected to remove legal bottlenecks for pending projects,” the fund said.