It may take Vietnam two years to get upgraded to emerging market level from the current frontier market classification, VNDirect Securities Corporation said in its 2020 outlook.

Illustrative image (Source: VNA)

The Vietnamese stock market missed the chance in June 2019 as Morgan Stanley Capital International (MSCI) kept Vietnam at frontier status.

MSCI also did not add Vietnam to the watchlist for a potential upgrade.

The firm made the decision as Vietnam fell short in terms of qualitative measures despite meeting all quantitative criteria.

Some qualitative indicators that fall short of expectation were limited openness and unequal treatment of foreign investors regarding foreign ownership limitations, lack of information disclosure in English, lack of an offshore currency market and lack of an independent securities clearing centre.

Approximately 1 billion USD worth of foreign capital is expected to flow into Vietnam’s stock market if it is officially re-classified to emerging markets status from funds that invest in MSCI Emerging Markets Index and FTSE Emerging Markets Index, VNDirect Securities said.

But VNDirect Securities said there are several factors that could change the situation.

Firstly, the amended Law on Securities, which was approved by Vietnam’s National Assembly on November 26, 2019, will come into effect on January 1, 2021.

Vietnam has also made changes in the Law on Enterprises and the Law on Investment. The two laws will be brought to the upcoming National Assembly meetings for discussion and approval in June.

“Changes in these laws will contribute to removing the current hurdles to the re-classification of Vietnam’s stock market, including foreign ownership limitation and equal treatment for foreign investors,” VNDirect Securities said.

The best scenario is the Vietnamese stock market will be added into MSCI’s watchlist for the re-classification at its annual review in June 2021 and the decision will be made in June 2022.

In the near future, despite not being added to the watchlist for re-classification, Vietnam may still benefit from a larger inflow of foreign capital that targets frontier markets.

That is because MSCI announced in June 2019 that Kuwait will be re-classified as an emerging market in June 2020, which could raise Vietnam’s weight in MSCI Frontier Markets Index and MSCI Frontier Markets 100 Index to 25.8 percent and 30 percent, VNDirect Securities estimated.

As of December 10, 2019, Vietnam’s weights in the two indices were about 16 percent and 13 percent, MSCI data showed.

“If Kuwait gets an official upgrade to EM status, Vietnam's stock market could enjoy investment inflow of about 200 million USD from funds that trade in MSCI Frontier Markets.”

Foreign capital inflows will continue to focus on Vietnam’s large-cap stocks currently in MSCI Frontier Markets Index and MSCI Frontier Markets 100 Index, including dairy producer Vinamilk (VNM), property and industrial group Vingroup (VIC), property firms Vinhomes (VHM), Vincom Retail (VRE) and Novaland (NVL), consumer company Masan (MSN), steel producer Hoa Phat (HPG) and Vietcombank (VCB).