In July 2015 the new Law on Investment came into effect in Vietnam, mandating that the foreign ownership limit for public and listed companies (as well as for securities companies and investment funds) will be subject to the Securities Law. The Securities Law mandated that companies not on the Conditional Sectors list shall have no foreign ownership limitations. Since then only six companies have removed their foreign ownership limits.
Today we received confirmation from the State Securities Regulator (Vietnam’s financial regulator), and from Vinamilk (VNM VM), the largest Vietnam listed company (and 25.8% of PXP Vietnam Emerging Equity Fund – PXPVEEF KY), that permission has been granted for Vinamilk to remove its foreign ownership limit. We expect this to happen within the next day as the Vietnam Securities Depository changes the number of shares available to foreigners to include all shares issued.
We feel that this is the most significant development in the Vietnamese stock markets since 2006, and that the raising of limits in Vinamilk and resultant increase in its share price will encourage the rest of the market to undertake similar moves. This is in line with the government ambition to transition from MSCI Frontier Market to Emerging Market status; access, liquidity and foreign participation are being boosted.
The first point of the forecasted four-part rally has been happening already. This document is an update to a comment first published 13 months ago.
1. Pre-Positioning: Domestic Activity
The time frame for increased limits will begin to overlap with the investment time-horizon of domestic investors (who are currently c.85% of daily turnover), and a belief that limits are indeed going to be increased will drive a domestic switch in investments from the “jockey-stocks” to the true blue-chip names at the foreign-ownership limits (e.g. into HCMC Securities, Vinamilk, FPT Corp, REE Corp, VN Container Shipping, etc.).
The share price of foreign-limit stocks will move higher as domestic investors buy to position themselves ahead of relaxation. We have now begun to see this in Vinamilk which will remove its foreign ownership limit this week.
2. Implementation: A New Wave of Foreign-Buying
When limits are actually increased, foreigners will be able to buy stock in the market from domestic investors. Stock price appreciation will be constrained only by the daily movement limit of the respective markets (HOSE +/-7% & HNX +/- 10%). We would expect stocks such as Vinamilk (20.3% of PXP VEEF NAV) to appreciate by the maximum daily limit for at least a number of days if the current unfilled daily foreign-bid queues at local brokers are any indication, until equilibrium is reached where foreigners are willing to sell as well as buy.
3. Rebalance: ETFs Late to the Party
The two Vietnam ETFs (VNM US & XVTD LN) will be likely to require a dramatic rebalance at the first quarterly-review following implementation of increased limits. This will now include a number of stocks that were previously at their foreign-limits and are therefore newly available for inclusion in the indices which the ETFs track. This will again involve domestic pre-positioning. Following this week’s removal of limits Vinamilk will be eligible for inclusion in the ETFs during the September 2016 quarterly rebalancing.
4. Long-term: Increased Breadth, Scale & Upside
Newly increased limits would boost the appeal of Vietnam’s equity markets, as well as faith in the government’s ability to deliver on promised reforms, meaning that a broader market with more scale would generate more interest, encourage further inflows and further upside beyond the shorter-term movements around increased limits.
Increased foreign accessibility to the stock markets in Vietnam will also be a key step in the progress of upgrade from MSCI Frontier to MSCI Emerging Market status and the ensuing capital that will flow with that transition.
Frequently Asked Questions:
What is the latest on Foreign-Ownership Limits?
There are six companies that have removed their foreign ownership limits, and Vinamilk will be the seventh. The previous limits were set at 49% for all listed-equities, except banks which are still limited to 30%. A total removal of the limits across the market is the ultimate goal. We still await clarity on the list of Conditional Sectors.
Why do limits need to be increased?
Transparency: larger blocks of shares of foreign-limit stock are forced to trade off-market. The daily movement limits in HOSE (+/-7%) and HNX (+/- 10%) mean that foreign investors willing to pay, for example, a 20% premium for shares in FPT or Vinamilk, must do so off market with no visibility or transparency.
Facilitation: as blocks are forced to trade off-market and not by the usual method of order matching through the day, it is difficult for highly-regarded and foreign-limit stocks to move in price, which in turn means that domestic investors are uninterested in participating and the market does not reflect the true value of these stocks.
MSCI Emerging Market Status: Removal of limits is a key limiting factor currently holding Vietnam in the Frontier Market segment.
If foreign-limit stocks currently trade off-market at significant premia to their listed price, should you not sell FOL stock before the move to lock in the premia?
No. We firmly believe that the potential appreciation in price of the stocks that are at their foreign-limits, should those limits be raised, is much greater than can be achieved by selling those stocks ahead of the relaxation. We will not sell down foreign-limits stocks until they reach what we consider to be at least fair value and we will continue to limit new subscriptions to match outgoing redemptions to avoid dilution of existing shareholder weightings in those stocks that we believe will participate in a four-part rally as outlined above.
Is there precedent for increased FOL in Vietnam?
There is – in 2000 when the Viet Nam Index was launched foreign ownership limits were initially set at 20% for all listed equities before they were raised to 30% in 2003. There was a further raise in 2006, as one of the first significant reforms by the current Prime Minister, where limits were increased to the current level of 49%. In late 2006 foreign participation in the market was 35-40% of daily turnover compared to 10 to 15% now. We believe that the PM is fully aware how increased limits will benefit the market and the country and stands ready to relax FOL once again.
What will the impact of increased FOLs be on the two Vietnam ETFs?
The initial impact on the two Vietnam ETFs is likely to be neutral to negative. As the domestic investment community gives credence to an impending relaxation of limits, retail investors will begin to buy stocks which are at their foreign-limit in anticipation of foreign-buying. This buying will be partially funded by selling stocks which are not at their limits, i.e. those that are in the ETFs (which by definition have to be large, liquid and, crucially, available to foreigners). At the next quarterly ETF rebalance following the actual implementation of increased limits, there will likely be a dramatic transition of the portfolio of the two ETFs into the stocks that have become available, providing further impetus in the prices of those stocks. So; the ETFs will not participate in the first two stages of the rally, and may in fact be the cause of the third stage of the rally as they include the newly available stocks.
As on the 30th June 2016, PXP Vietnam Emerging Equity Fund had 56.2% of its Net Asset Value invested in companies which are at the foreign-ownership limit, and 25.8% in Vinamilk. It is not currently possible for a foreigner to replicate this part of the portfolio in the market.
Lawrence Brader is a portfolio manager at PXP Asset Management in Ho Chi Minh City