Mr. Andy Ho, Chief Investment Officer of VinaCapital and Managing Director of the Vietnam Opportunity Fund, discusses the lifting of foreign ownership limits on Vietnamese equities.
The Decree No. 60 has been signed and a key part of it is the lifting of foreign ownership restrictions for Vietnamese listed equities. Details of the decree are still being finalized but we expect the foreign cap will move from 49 per cent to 100 per cent, with exceptions for select sectors such as banking.
After a difficult period, Vietnam has established a sustainable growth rate of 6 per cent and Decree No. 60 allows foreign investors to play a greater role in future growth. It is a game-changer, bringing Vietnam closer to fulfilling its WTO commitments and may serve as a catalyst for ascension to MSCI’s Emerging Market Index.
Foreign ownership limits on listed companies have been a major hurdle for capital markets, deterring many foreign investors. The limits have effectively capped the level of foreign participation and depressed valuations, so there has been much anticipation regarding the lifting of these limits.
Market re-rating and rallying
Vietnam has historically suffered from a liquidity discount compared to its regional peers. Measured on a simple PE basis, the market currently trades at 13 times trailing PE, with a liquidity discount in recent years of between 25 per cent and 35 per cent. With the market opened, a greater level of participation from both local and foreign investors is expected. This increased liquidity will go some way to narrowing the discount.
A catalyst for SOE equitization
As markets re-rate and liquidity increases we expect a more exciting period of increased valuation to encourage greater participation from State-owned enterprises and private companies. As the government starts to clear the backlog in its equitization program, the options for investors through public listing, sales to strategic investors, and a likely increase in consolidation through M&A activity is exciting, especially in high-growth sectors such as food & beverages, property, and infrastructure. The sectors that the government considers strategic and in which they will not sell controlling stakes are expected to include banking, telecommunications, airlines, and defense companies. However, given that the government wants to reduce the number of banks by half by 2017, we could see more relaxation in this sector.
Development of a properly functioning stock market
Vietnam’s market capitalization is currently $60 billion, with daily trading volume averaging $100 million, and foreign participation at less than 15 per cent, largely due to foreign limits. Twenty-six companies are currently at the foreign limit, with combined market capitalization of $10.2 billion, or 17 per cent of total market capitalization. This lack of depth in the market and the resulting domestic investor bias, assisted by margin lending levels, has featured as predominant reasons for market volatility. Greater foreign investment and the depth created by new listings will aid in reducing this volatility.
The Decree No. 60 is an exciting development and of great importance as it will open Vietnam up to the world, making the market more competitive, accessible and investor friendly. Furthermore, the market will benefit from a re-rating and a bigger allocation by global fund managers. The liquidity gap will close, volatility will reduce, and renewed interest in the equitization program will deepen the market. Longer term, Vietnam also becomes a strong candidate for MSCI Emerging Markets inclusion. At VinaCapital we believe this dramatic lifting of foreign ownership limits will immediately make Vietnam the most attractive Asian frontier market.