Exchange-traded funds linked to the Vietnamese equity market, such as Deutsche AWM‘s db x-trackers FTSE Vietnam UCITS ETF (XFVT LN) and Van Eck‘s Market Vectors Vietnam ETF (VNM), are likely to benefit from new regulations relaxing the restrictions of foreign stock ownership in Vietnam.

The Vietnamese economy has been favoured lately by investors over other frontier markets due to consistent economic growth, favourable demographics, mass urbanization, strong foreign direct investment and ongoing reforms to state companies and the banking system. However, foreign ownership levels are already at their cap level for many major companies; a relaxation on these limits could provide significant increases in trading and liquidity levels of Vietnam-based ETFs.

A stabilising economy and upcoming stock market reforms could boost Vietnam-based ETFs

Improving economic indicators

Vietnam has been able to achieve stable, attractive growth levels in recent years. The economy had an annualised growth rate of 6.3% for the first half of 2015, marginally above the goal of 6.2% growth for the year.

The country boasts one of the highest urbanization rates in the region. Data from the World Bank and the United Nations World Urbanization Prospects reveal the percentage of population living in urban areas is only 33%, while the urbanization rate of 3.1% is relatively high compared to similar economies.

Consumption levels are rising in line with the burgeoning urban population, the country is recording rising internet coverage (over 40m users by latest estimates), and upcoming relaxation of visa rules are predicted to increase tourism levels by 50% within three years, helping to further stimulate the economy.

Inflation has been reined in since highs of 18.7% in 2011, to a more stabilising, business-conducive 4.1% last year.

The government is also promoting growth through increasingly ‘laissez-faire’ policies such as reduced corporate tax rates (down from 25% to 22% with a further cut to 20% due to be initiated in 2016), privatisation of state-owned companies, and the devaluation of the Vietnamese Dong, which will make the country’s exports more attractive.

There are some indicators that will require monitoring to ensure continued stability in the country: the property market is showing signs of overheating, the government mechanisms put in place to reign in bad debts in the banking system are struggling to gain steam, and state firms remain sluggish amid a slowly-progressing privatisation scheme.

Foreign Direct Investment

A recent report by fDi Intelligence, a specialist provider of cross-border investment analysis, highlights the outstanding levels of greenfield foreign direct investment in Vietnam over the last decade. Greenfield investment is a type of foreign direct investment whereby firms build new operational premises in a country rather than buying out existing assets. This is beneficial for the country due to activity in the construction sector, the establishment of long-term jobs for employees at the newly built sites, and signalling general long-term confidence for profit-generation in the country.

Vietnam had over 100 unique greenfield projects in 2014 and over 2000 in the last decade. The paper further provides comparative analysis of states by ranking them by the highest proportion of greenfield investments relative to expected amounts given the size of the country. Vietnam topped the list in 2014 with 8.1 times expected investment, far above the second highest country, Romania, with 3.9 times expected investment.

China, perhaps surprisingly, recorded a score of 0.6, indicating greenfield investment levels were below expected levels. Over half the recorded greenfield investment in Vietnam was in the manufacturing sector, illustrating an ability to compete with China in this regard due to its abundance of low-cost labour.

International investors who made notable contributions over the decade include Intel, Samsung, and Procter and Gamble.

Stock Market Reform

A recent government announcement to remove the 49% ownership cap imposed on foreign investors should serve to spike buyer’s interest, drastically improve liquidity, and speed up the privatisation of state controlled companies. The move is due to take effect in September. Some sectors are expected to be wholly liberated, while analysts expect other sectors, such as banking or real estate, to maintain a cap to some degree.

Many of the largest companies listed on the exchange already have foreign ownership levels at the current allowable cap, indicating the attraction of these investments with foreign buyers and suggesting a strong surge in activity following the reform. In this event, ETFs which are long Vietnamese stocks could be well positioned to profit.

The government is targeting an upgrade in Vietnam’s status from a frontier market to an emerging market with these reform proposals, thereby necessitating its inclusion in the more prominent MSCI Emerging Markets Index, increasing the number of tracking funds and further boosting liquidity.

Vietnam ETFs

The db x-trackers FTSE Vietnam UCITS ETF (XFVT LN) tracks the performance of the FTSE Vietnam Index, which measures the performance of companies listed on the Ho Chi Minh City Stock Exchange that have sufficient shares available for foreign ownership. The index is a total-return index with a current distribution yield of 2.78%. It is currently heavily weighted to financials (63.9%), followed by the consumer goods (12.7%) and industrials sectors (11.6%). The top components of the index include Masan (15.6%), Vietcombank (10.6%), Petrovietnam (7.2%), HAGL (6.1%) and Kinh Do (5.2%). The ETF has total expense ratio (TER) of 0.85%.

The Market Vectors Vietnam ETF (VNM) is traded in USD and listed on the NYSE Arca. The fund tracks the Market Vectors Vietnam Index, a rules-based, modified market cap-weighted index that consists primarily of firms listed in Vietnam but also extends inclusion to globally listed firms that derive the majority of their revenues from within Vietnam. As such, the current country exposures (in terms of listing venue) are Vietnam (77.8%), the United Kingdom (8.3%), Australia (4.4%), Thailand (4.4%) and South Korea (4.3%).

The fund is currently heavily weighted towards the finance sector (43.1%), followed by the energy (17.5%), consumer staples (14.5%), consumer discretionary (9.6%), and industrials sector (7.3%). There are 30 holdings in total of which the presently highest concentrations are in Bank for Foreign Trade of Vietnam (8.7%), Vincom (8.7%), Masan (6.9%), Saigon Thuong Tin (6.5%) and Baoviet (5.3%). The TER is 0.7%.