SAM Speaks To Wall Street Journal about Foreign Ownership Limit Removal

SAM 30th July, 2015


A long-awaited and unprecedented change to Vietnam’s foreign ownership regulations has fueled a strong rise in the country’s stock markets this month as local investors load up on shares, hoping to cash in on an anticipated wave of foreign buying. 

Since the new regulations were proposed late last month, Vietnam’s main stock index is up 9% and the smaller Hanoi stock index has risen 3.6%. China’s Shanghai Composite and even the Philippines’ popular stock index have fallen 5.3% and 1.6%, respectively, as a year-long rally in Chinese shares suddenly reversed, spooking investors globally.

Vietnam’s communist government has traditionally kept a tight rein on foreign investment in the country’s stock markets, which has resulted in them having to pay premiums of as much as 15% on some of the most popular stocks. The ownership-limit changes, expected at the beginning of September, have triggered a shopping spree among local retail investors. 

Nguyen Hong Khanh, an office worker in Ho Chi Minh City, Vietnam’s economic capital, says the anticipated change to regulations is already netting him more than two-thirds his annual salary as an office worker if he sold his share holdings today.

Individual investors such as Khanh account for around 90% of trading volume in Vietnam. Many expect that overseas investors will flood into local markets when the ownership limits are raised as yield-starved funds look to grab a slice of one of the world’s hottest frontier markets. 

“Why shouldn’t I buy more [shares] at this time?” he said by telephone from his office. “Once the limit is lifted, foreign investors will pour money in and I can have a chance to cash in.”

Markets were surprised late last month when Vietnam’s State Securities Commission said it would remove its limit on foreign ownership of Vietnamese companies, except for those firms operating in areas sensitive to national security. The market had previously expected the current 49% limit on foreign ownership to be increased only to 60%. 

The government has yet to specify details on exactly which companies or sectors will be excluded from the new foreign cap, aside from banks, which will be capped at 30%. The changes should take effect from September 1. 

Khanh, 39, said he already owned 1 billion dong ($46,000) worth of shares and will keep buying until 80% of his disposable income is invested in the stock market. He plans to use some of his gains to pay for his three-year-old daughter to go to kindergarten in September. 

Foreign interest is already rising in Vietnam. In the first six months of the year foreigners bought more than $233 million worth of Vietnamese stocks, exchange statistics show, well above the $128 million for the whole of 2014. 

As of this week around 30 companies, which account for about a quarter of the roughly $50 billion total market capitalization of Vietnam’s main Ho Chi Minh Stock Exchange, were trading at or near their foreign ownership limits, exchange statistics show.

Among them are Vietnam Dairy Products JSC, known as Vinamilk, and Binh Minh Plastics JSC, which have risen 2.6% and 4.5%, respectively, since late last month when the government indicated it would lift the foreign ownership cap. 

If the government goes through with plans to lift the foreign ownership cap on stocks like these, it could transform the local market, said Louis Nguyen, chief executive and chairman of Cayman Islands-domiciled Saigon Asset Management, which oversees about $75 million in Vietnam. The reforms could “potentially unlock billions of dollars of room for overseas investors and start to open the floodgates for those looking for exposure to Vietnam,” he said.

Under the present rules, strong demand from foreigners for the biggest and best-run local companies has created an alternative off-market system in Vietnam, where foreign investors charge other overseas investors up to a 15% premium to sell companies most in demand. 

Foreign investors such as Saigon Asset Management’s Nguyen say there are dozens of smaller companies in Vietnam with capacity for foreign ownership and attractive valuations, but their market capitalization is too small to make them viable investments for large institutional funds, narrowing the options to the larger firms.

Vietnam’s government plans to privatize as many as 289 state companies this year in a bid to streamline state operations and boost the local stock market. But progress so far has been slow: only 61 state enterprises had been privatized as of June 23, just a fifth of the target for the whole of 2015. 

Vietnam remains a difficult place in which to invest, too. In order to trade, foreign funds need to be locally registered, which can take months to set up, leaving many investors reliant on specialist funds already established in Vietnam, or looking to gain exposure through indirect investment products such as exchange-traded funds.

Local investors are still confident that the government’s stated ambition to open up more to foreign investment will pull in foreign investors, despite the challenges. 

“It’s just the beginning for Vietnam’s stock market,” said Khanh, the office worker from Ho Chi Minh City. “I would advise my friends and relatives to put their idle money in the market now. It’s a good investment channel,” he said.