Vietnam stocks open, but foreigners still waiting

Vietnam’s participation in the Trans-Pacific Partnership (TPP) trade deal signed last week is another positive step for one of Asia’s most dynamic economies. But the good news isn’t translating into portfolio inflows, at least not yet.

In June, the government relaxed foreign-ownership limits (FOL) on listed companies. This, along with an ongoing privatisation programme, robust foreign-direct investment and a healthier banking system, is meant to attract foreign investors.

So far the board of directors of only one company, Saigon Securities, has voted to remove foreign-ownership limits.

In an October 5 note, Kevin Snowball, chief executive of PXP Asset Management in Ho Chi Minh City, wrote: “Unfortunately the stock that thrust itself to the fore in the guinea pig race hadn’t reached the previous [FOL] when it removed the limit, and at the time of writing is still less than 49% foreign owned.”

PXP does not own shares in Saigon Securities.

Dominic Scriven, CEO at Dragon Capital, whose funds do own Saigon Securities shares, argued the pace of FOL removals will quicken. “Over the next 12 to 24 months, we’ll see more dynamic companies with outward-looking management pushing for this,” he said in a recent interview with AsianInvestor.

For example, the management of Ho Chi Minh City Infrastructure Investment (CII) has proposed to its board that it lifts its FOLs.

But the removal of FOL is not like simply flipping a switch. Vietnam’s prime minister, Nguyen Tan Dung, signed a decree on June 26 (called Decree 60) enabling listed companies to decide individually whether to increase their foreign ownership limit from 49% up to 100%. Foreigners can already own up to 100% of private companies in most sectors, and up to 30% of listed banks, whose status hasn’t changed.

Companies that opt to welcome more foreign buyers are likely to make this a competitive advantage, say fund managers. Majority foreign ownership will require greater transparency and in theory should boost a firm's value relative to its more opaque peers.

Scriven said the country’s stock markets’ combined capitalisation is likely to rise from $65 billion today to $100 billion over time, as FOL reform, privatisation and TPP-driven restructuring expand and improve the opportunities for foreign buyers.

But he wouldn’t say how long this might take.

In Vietnam, positive agendas are typically held back by obscure bureaucratic battles and reluctance by many ministers and corporate executives to open their books to outside scrutiny.

The FOL liberalisation is a typical case. Decree 60 theoretically made the relaxation effective on September 1. While some private-sector companies are eager to take advantage of the opening, the details of the law have yet to be released, which may be why few others are acting on it.

The biggest hurdle is that the government has made clear in Decree 60 that certain sectors will not be eligible for expanded (or indeed any) foreign ownership. The problem is that it has not said what those sectors are. PXP's Snowball said there is a rumour that the Ministry of Planning and Investment has “discovered, defined or invented” up to 267 such sectors.

If the rumour proves accurate, that is a large number of sectors for a stock market currently composed of fewer than 700 listed companies. The idea of such a long list also suggests that many in government are seeking to hold up the prime minister’s reformist agenda.

The good news, though, is that even if the ultimate list of ineligible companies is big, once the ministry publishes it, by law the rest of the stock universe (except for banks) will then be free to relax or scrap FOLs.

Snowball said that will pave the way for many of the country’s more entrepreneurial companies to act – and create new opportunities for investors looking to access one of the region’s brightest economic stories.