Vietnam required to wait in line for desired MSCI market status

08:00 | 22/04/2020
Postponement of Kuwait’s upgrade to the MSCI’s Frontier Emerging Market Index is being called a blow for Vietnam, with large-cap firms being among the biggest beneficiaries when the process is eventually pushed through.
1488 p22 vietnam required to wait in line for desired msci market status
Vietnam required to wait in line for desired MSCI market status - illustration photo

American finance giant MSCI announced postponement of reclassification of the MSCI Kuwait Indexes until the SemiAnnual Index Review at the end of the year, instead of next month as initially planned.

The delay is bad news for Vietnam because when Kuwait gets an official upgrade to emerging market status, Vietnam could benefit from a larger inflow of foreign capital that targets frontier markets as the largest constituent on the list.

After the Kuwait reclassification, Vietnam’s weights could be increased in the MSCI Frontier Market Index and MSCI Frontier Market 100 Index to 25.2 per cent and 30 per cent, respectively, from 15.4 and 11.1 per cent now, according to Viet Dragon Securities Company.

In the notification, MSCI emphasised that MSCI Kuwait Indexes continued to meet all the requirements for upgrading to Emerging Markets.

The decision comes as international institutional investors have informed that they experienced difficulties in the process of opening accounts required to trade Kuwaiti stocks as a result of COVID-19 preventive measures.

The postponement has spillover effects for Vietnam. Waiting until November seems like a bitter pill to swallow, as Vietnam was poised to become the largest part of the MSCI Frontier Markets Index next month.

Last year, one of the significant events Vietnam was hoping to occur last June unfortunately did not transpire – being upgraded on the MSCI watchlist for emerging markets.

Some analysts warned that the country is unlikely to be shortlisted for a possible lift to an emerging market in 2020 despite satisfying all quantitative requirements for inclusion.

Based on the MSCI guide, Vietnam falls short on qualitative measures. Hinh Dinh, senior analyst at VNDIRECT, cited lack of information disclosure in English; limited openness of the market to foreign investors and equal treatment in foreign ownership limitations; lack of an offshore currency market making it difficult for foreign investors to convert holdings from the dong; lack of an independent securities clearing centre; and other criteria for trading, securities transfer, and derivative products.

“Vietnam’s stock market needs at least one year before being included in the shortlist, and another one to two years to be officially upgraded to emerging market status,” added Dinh.

On the other hand, efforts to contain the virus have pushed global markets into further losses. Financiers around the globe have trimmed their appetite to risky assets, triggering the outflow from funds tracking the MSCI Frontier Markets Index.

The current turmoil has cast a new light on the allocation strategies as frenetic swings whipsawed the markets. Data reveals the total net asset value of those funds tracking the MSCI frontier and emerging indexes reached $1.915 trillion as of April 9, down 37 per cent since December.

Looking on the bright side, if Kuwait makes it into the upgrading list, the Vietnamese bourse may lure an estimated total of $120 million from funds trading in the MSCI Frontier Emerging and MSCI Frontier Markets 100 indexes, given net asset value of those funds remain stable at the current level.

Optimists believed that blue-chips, especially those on MSCI indexes, would have foreign investors’ cash firmly in their pockets in the coming time. These include large-caps such as Vingroup (VIC), Vinamilk (VNM), Vinhomes (VHM), Hoa Phat Group (HPG), Vietcombank (VCB), and Masan (MSN).

“If Vietnam rectifies the discrepancies in their laws regarding investments and securities with the trade agreements of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the EU-Vietnam Free Trade Agreement, and the EU-Vietnam Investment Protection Agreement, they will have a greater chance at making the MSCI watchlist upgrade for 2020,” said Oliver Massmann, general director at law firm Duane Morris LLC Vietnam.

It is estimated Vietnam could receive up to $10 billion worth of foreign capital in frontier market-focused funds, but could receive much more from emerging market-focused funds.

By Minh Luu

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