Vietnam set for emerging market status in 2025. Source: baodautu.vn

The move, which has been long anticipated, is set to unlock a wave of foreign investment and bolster liquidity in the country's equity markets.

"This is a game-changer for Vietnam," Lumen Vietnam Fund stated in its latest market outlook on February 18. "The reclassification will draw significant capital inflows from global ETFs and institutional investors, injecting fresh momentum into the market."

While the FTSE upgrade is imminent, Vietnam is also making steady progress towards an MSCI reclassification, which is widely seen as the bigger prize.

"Vietnam is actively addressing market accessibility issues and enhancing transparency," the fund noted. "An MSCI upgrade may still be a medium-term goal, but the country is clearly heading in the right direction."

To this end, authorities are rolling out an ambitious set of reforms. The introduction of intraday trading, short selling, and an expanded derivatives market is designed to enhance market depth. Simultaneously, Vietnam is easing foreign ownership limits to attract global capital.

The government is also pushing for greater financial transparency, with all listed companies required to adopt International Financial Reporting Standards (IFRS) in 2025.

"The shift to IFRS will improve financial clarity and make Vietnam a more attractive destination for institutional investors," Lumen Vietnam Fund highlighted.

On the other hand, Vietnam’s central bank is expected to maintain its accommodative stance, keeping 12-month deposit rates steady at 5.0-5.5 per cent. This approach aims to support economic expansion while ensuring financial stability.

However, external risks persist. Higher-for-longer interest rates in the US and Europe could weigh on foreign indirect investment (FII).

"If global rates stay elevated, the USD/VND exchange rate could come under pressure," Lumen Vietnam Fund warned. "But with solid foreign reserves and hedging tools in place, Vietnam has the buffers to navigate these challenges."

Vietnam’s burgeoning trade surplus with the US remains a double-edged sword. While it underscores the country’s export competitiveness, it also exposes Vietnam to potential trade frictions, particularly if a second Trump administration takes office.

"A Trump 2.0 scenario could bring renewed tariff threats, but Vietnam has levers to mitigate risks," the fund noted. One potential countermeasure is increasing LNG imports from the US, which would not only help balance trade flows but also enhance Vietnam’s energy security.

More broadly, the recently upgraded Comprehensive Strategic Partnership between the two countries is expected to drive deeper collaboration in technology and manufacturing.

"This partnership goes beyond diplomacy; it opens the door for tech transfer and industrial growth," Lumen Vietnam Fund stated.

Vietnamese corporates are also playing their part. Vietjet’s blockbuster order of 200 Boeing jets, with 14 scheduled for delivery in 2025, is a testament to strengthening commercial ties. Meanwhile, a $1.5 billion resort and golf course project between KBC and the Trump Organisation in Hung Yen signals continued US investment in Vietnam’s burgeoning real estate sector.

Liquidity and banking sector risks

While Vietnam’s stock market has seen a pick-up in trading volumes, liquidity remains a weak spot. The rollout of the KRX trading system and new investment instruments is expected to provide much-needed improvements.

"Liquidity remains a challenge, but these structural reforms will help," the fund said. "We expect market depth to improve meaningfully as new trading mechanisms take hold."

Meanwhile, bad debt in the property and construction sectors remains a concern. Non-performing loans are exerting pressure on the banking system, though not at crisis levels.

"Stronger financial oversight and the establishment of resolution funds will be key to preventing broader contagion," Lumen Vietnam Fund cautioned.