Vietnam’s capital markets history spans a mere 21 years, beginning in July 2000 with the launch of the Ho Chi Minh City Stock Trading Center, which was only upgraded to a full stock exchange in 2007. The market has developed at a breakneck pace in the wake of the global financial crisis of 2008–09 and following Vietnam’s induction into the World Trade Organization in 2007.
Since then, Vietnam’s stock market capitalization as a percentage of its GDP has increased rapidly from 12.4% in 2008 to 72.6% in 2019. Important milestones in its capital markets development included the passage of the securities law in 2006 and the launch of the country’s financial derivates market in 2017.
Several laws came into effect at the beginning of 2021, setting the legal basis for planned market developments. Among these are the restructuring of the two Vietnamese exchanges – Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX) – into a single Vietnam Stock Exchange (VSE), the establishment of the Vietnam Securities Depository and Clearance Corporation (VSDC), Non-voting Depository Receipts and other developments that may potentially improve market accessibility once implemented.
Over the past year, the country’s exchanges have experienced a boom in liquidity driven by retail investors. This has led to difficulties in executing trades on days with relatively high volume. The exchange and the regulators are working on solutions to this issue.
Joann Lim, Associate Director, Equity Sales and Trading at HSBC offers further insight into current trading conditions in Vietnam.
What are some specific challenges of trading in frontier markets such as Vietnam?
Like a few other frontier markets, there are no overdraft facilities and pre-funding of trades is required. Therefore, prior to trading, brokers need to check they have sufficient balances of cash for purchases or shares for sales with the custodian bank.
Vietnam is a client ID market and omnibus structures are not available. And selling of odd lots is a manual process requiring paperwork, which takes two weeks for transactions to be completed.
In addition, there are high premiums of approximately 3%–7% on stocks which breach the foreign ownership limit (FOL). The current prescribed limits are 30% in banks and 49% in other sectors.
Have recent increases in liquidity made Vietnam’s Ho Chi Minh City Stock Exchange more easily tradable? And overall, does finding liquidity and limiting slippage remain a challenge?
The year-on-year turnover for the Ho Chi Minh City Stock Exchange has risen six-fold to about $1 billion. There are up to 50 stocks with total market capitalization of over $1 billion, which can be traded relatively easily. Liquidity or slippage are no longer constraints except for full-FOL names.
On 1st June, a surge in orders prompted the halting of the exchange’s afternoon trading session. How urgent is an infrastructure upgrade, and when could it happen?
The exchange started to experience outages since December 2020, with the outages intensifying in the middle of this year due to the sizable increase in turnover.
The exchange then worked with FPT Corp, the largest IT service provider in the country, to apply a different core from 1st July 2021. This has resolved the outages. Additionally, the exchange will deploy a new trading system purchased from the Korea Stock Exchange at the end of this year after a six-month trial run. The new system is expected to greatly enhance the exchange’s capacity, giving it the ability to support daily turnover of up to $4 billion.
What factors could result in a sudden reversal in liquidity?
It is estimated that retail investors currently account for the lion’s share of overall market participation, at more than 80%. A high percentage of those retail investors are trading on margin. According to the State Securities Commission (SSC), from the end of the first quarter of 2020 to July 2021, the margin loan balance has increased nearly three times to reach approximately VND110 trillion ($4.8bn). A tightening of margin lending, a hike in interest rates or dampening of retail investor sentiment could have significant impacts on liquidity.
If liquidity remains on its current trajectory, could it reach a “tipping point” that leads to a surge of inflows into the market?
From a retail investor standpoint, Vietnam has already crossed over a “tipping point.” Currently, more than 130,000 new retail trading accounts are being opened each month, compared to 30,000 new account openings in the month prior to the Covid-19 outbreak. The low interest rate environment is one of the major factors behind the surge in account openings.
Given the surge in foreign inflows, Vietnam stands a good chance of being upgraded from a Frontier Market to attain Emerging Market status.
