New exchange platform will improve investment environment in Vietnam
The Ho Chi Minh City Stock Exchange (HoSE) reopened yesterday 5 May after the Reunification Holiday with an upgraded trading platform. It’s both a necessary and welcome move which will yield immediate benefits for anyone who wants to invest in one of Asia’s most dynamic economies.
Over the longer term, it will help Vietnam’s bid to gain emerging market status in global indexes, a designation that would open up the markets to a far larger pool of investors.
A better way to trade
The new system is based on Korea’s KRX platform. The upgrade has been a long-running project, and not everything has gone smoothly. In fact, the exchange conducted trial runs in April last year before announcing it would temporarily suspend plans to transition.
Now that it’s live, investors can expect an immediate improvement. The new exchange will be able to handle 1,000 orders per second (compared with just 400 on the old platform), transaction speed will improve from 25ms to 10ms and traders will now be able to amend an order without cancelling it.
The new system should also help shorten settlement cycles and lay the foundation for a central clearing counterparty system, which would improve market stability and make trading more efficient and secure.
The upgrade is crucial, as the old system was groaning under the weight of increasing volumes. A surge in volume forced the HoSE shut for several days in 2018 and again in 2021. Temporary improvements by local digital champion FPT allowed trading to continue, but the exchange clearly needed an upgrade to handle the growing number of domestic investors. At last count, there were 9.7 million Vietnamese investors, with close to 150,000 signing up for accounts within the last three months alone.
While domestic investors make up the bulk of trading volume on the exchange, the changes will also be better for investors overseas too. The great majority are brokerages or institutional investors. In the short term, it’s unlikely the new platform will enable overseas retail investors to trade Vietnamese stocks directly using an app.
But for brokerages and institutional investors, the new platform will be better suited to buying and selling without prefunding. Previously, overseas investors were required to prefund trades, which required investors to put money into a local account and wait for it to clear.
This rule was an obstacle for passive exchange-traded funds (ETFs), which usually spread their investments across several markets, replicating the constituents of an underlying index. In order to remain fully invested, they might have to sell shares in one market and then wait several days for the funds to clear in Vietnam, impacting how well they track the underlying index.
The regulators dropped the requirement in November, but that created issues too, because it meant brokerages effectively needed to offer credit in order to settle the trade. The new KRX system will be built to handle the removal of prefunding, making the whole process easier.
From frontier to emerging market
The upgrade to the exchange is part of a broader plan. It will help Vietnam make a case to global index compilers FTSE Russell and MSCI that the country should be treated as an emerging market rather than a frontier market.
This reclassification isn’t just academic. If Vietnam were to attain the designation, it would be a significant transformation with far-reaching impacts. Listed Vietnamese companies would be included in a number of emerging market indexes, which would make them available to a far larger pool of investment capital.
Initially, it might push company values higher as more emerging market funds buy into local stocks to reach their quota of Vietnamese stocks. That would certainly be a bonus for those who are already invested.
Vietnam has been on the watch list for FTSE since 2018, and an upgrade could mean $6 billion in capital inflows from passive and active funds. An upgrade on the MSCI would be worth substantially more, but Vietnam isn’t on the watchlist yet.
Frontier markets are often characterized by poor liquidity, low transparency, limited access for foreign investors, potential for corruption, and weaker regulatory and legal frameworks. But sophistication varies hugely within the category.
Some European countries with small exchanges (Iceland, Romania, the Baltics and Croatia) are included in the MSCI Frontier Markets Index. A number of larger Asian economies like Bangladesh and Pakistan are on it too, while minnow markets like Cambodia and Laos don’t make the cut.
Vietnam seems like a prime candidate for inclusion in the emerging markets index. The economy is one of the strongest performers in Southeast Asia, it’s a key manufacturing hub and the stock market has shown impressive growth. Vietnam is by far the largest constituent of the MSCI Frontier Markets Index, making up 24% of the index.
Even so, the institutional investors, brokers and custodians who decide on classifications for MSCI have so far ruled that Vietnam doesn’t meet the 18 criteria for inclusion. The prefunding requirement was one obstacle to achieving emerging market status. The exchange itself was another.
Now that those two obstacles have been removed, the largest remaining impediment is the limit on foreign ownership of key stocks. In fact, currently more than 10% of the market is subject to such restrictions.
The indexing organisations require that each country spend a year on a watchlist before moving into a new category. That means Vietnam is at least a year away from achieving the upgrade on the MSCI index. FTSE Russell has had Vietnam on its emerging markets watch list since 2018, so its reclassification may come as early as September.
Either way, the upgrade is good news. It will strengthen Vietnam’s case for both, while delivering benefits to investors.