Vietnam can benefit from more foreign ownership of local stocks

Vietnamese asset managers are looking forward to when the country's State Securities Commission (SSC) raises the ownership limits for foreign investment in listed domestic firms. The government has committed to the increase, but uncertainty remains over when it will happen, and the SSC did not respond to calls and emails for comment by press time.

In the meantime, foreign activity is on the increase in Vietnam, says Kevin Snowball, chief executive of PXP Asset Management in Ho Chi Minh City. "Lots of foreign institutions are getting trading codes in Vietnam -- which they need as an individual identifier," he says. "It's similar to QFII [China's qualified foreign institutional investor scheme] in some respects, but you don't have to pre-fund your entire exposure."

And interest will only grow further when foreign-ownership limits are relaxed, as may happen this year, says Snowball. The government has made commitments under various treaties to increase foreign-ownership limits in banks from 30% to 49% -- which will hopefully happen by the end of the year, he says. The 49% limit for other stocks may also be relaxed down the road.

There's never been an on-market transaction between foreigners in Asia Commercial Bank, for example, says Snowball. That's because foreign holders don't want to sell stock into the market, given that the scarcity value might be expected to command a premium, he adds, but there is no mechanism to allow transactions outside the daily price-movement limits. But the raising of ownership limits will allow foreigners to access stock for the first time, albeit at a price, he adds.

As markets reach scale, more and larger institutions become interested, says Snowball. He cites the fact that in December 2005, total market cap on the Vietnam bourse was $500 million, but that figure doubled from the listing alone of dairy company Vinamilk in January 2006. That, in tandem with a very bullish report by Merrill Lynch a few days later, caused an exponential jump in the number of interested foreign investors, he says.

Others are also hopeful that stock-holding limits will be raised sooner rather than later. Louis Nguyen, chief executive of Saigon Asset Management in Ho Chi Minh City, says he doesn't see any reason why the government would not raise foreign-ownership limits in banks and other companies.

"It might happen in the following quarter or year," he says, "but it's difficult to predict what the government will do. However, the trend is that it will be inevitable that this will happen."

And such changes would help, because there will be interest at both the institutional/strategic level and the retail level, says Nguyen, who has just appointed a new CIO and deputy CEO. "Foreign banks would increase or take a new stake into existing local banks," he adds.

Local banks would benefit from the expertise and, most importantly, the customer service mentality of top global banks, which eventually leads to customer loyalty, revenue and profit, adds Nguyen. "There is still a very small percentage of bank accounts relative to the thriving population," he adds, "so the extent of investor flow is expected to be exciting."

However, analysts have raised concerns about the Vietnamese economy, acknowledges Snowball, whose firm is about to launch Vietnam's first open-ended fund and to list its flagship PXP Vietnam Fund in London. 

"You get the international investment bank-style fly-by once a year, when an economist takes a quick look at the trade deficit, inflation, currency concerns and so on, and reports that they're not bullish in the short-term," he says. "But you get a much different feel, long term, on the ground."

While the government will struggle to keep inflation under its target of 7% this year, says Snowball, he believes inflation will slow on a year-on-year basis from next month. Hence, during his trip to Hong Kong earlier this month, Snowball was scheduled to meet a well-regarded independent economist and said he hoped he would come to Vietnam and write something "more detailed, shall we say".

And analysts may be taking note, as just a few days after Snowball made these comments to AsianInvestor, a Barclays Capital research report took a relatively upbeat tone on the country, in which it comments that Vietnam's March trade deficit is not as bad as it looks.

Vietnam's January-March trade deficit was $3.5 billion, compared with a surplus of $1.5 billion in Q1 09, says the bank. On a three-month rolling basis, the deficit has stabilised at around $1 billion. At first glance, the trade gap looks sizeable, it adds, but that should be seen in the context of $2.5 billion of FDI disbursements and $1.5 billion of remittances during the quarter.

However, the report did take the view that inflation in the country would "grind higher" from the March 9.5% year-on-year increase (up from 8.5% in February) for a number of reasons. "Overall we expect inflation to hit double digits in April and the teens in coming months," adds Barclays Capital.