MSCI: Companies In Vietnam Get A Grim Reality Check As China Gets A Lift

By Ralph Jennings

This picture taken on Feb. 21, 2017 shows new high-rise buildings in Saigon.

Vietnam had just finished medicating the sting of Donald Trump pulling the United States out of the Trans Pacific Partnership. 

That trade deal would have lifted exports from Vietnam, where the economy is already growing around 6% per year largely because of a boom in manufacturing. 

Just as Vietnamese officials figured they could lean on a 2015 trade pact with the European Union and work with Japan on a revived Trans Pacific Partnership, they got more sour news.
This week the venerated New York-based builder of stock market indices MSCI placed China’s relatively mature “A” shares in its emerging market index but effectively decided Vietnam’s exchange didn’t qualify. 

A spot in the index would have pushed several hundred exchange-traded funds that track the index to shift a bunch of investor money into Vietnamese stocks, an obvious boon for the capital market that has grown keen over the past two years on luring foreign investment. 

Vietnamese stocks posted Southeast Asia's biggest percentage gain in 2013.
MSCI dissed Vietnam this year by declining to place domestically traded shares on a list of countries for review. 

A review could lead to inclusion on the emerging markets index, but Vietnam will stay in MSCI's Frontier Markets Asia Index instead. 

Although 36 Vietnamese firms had opened to majority foreign ownership or were in the process as of April, continued limited access from abroad still hurts, Hanoi-based SSI Research said in a note Wednesday. 

“The key issues for Vietnam still hinge on conditions of foreign ownership, including individual stock foreign ownership limits and total market-wide foreign ownership limits, and especially…the allocation of equal rights to foreign investors,” the note says. 

“Under the MSCI assessment, Vietnam was judged to be ranked the lowest level among frontier markets on conditions of foreign ownership.”
Prospects of Vietnam making it onto MSCI’s review list by 2018 are “quite bleak” without “major improvements” to market accessibility and ownership limitations for foreign investors over the next half year, SSI Research adds.
Vietnamese shares, though seen as a proxy for its economy, leave more for improvement than just access, people close to the market add. 

“Questions like market access, lack of English-language material, accounting standards and currency are still to be tackled, although a lot of progress has been made on the liquidity and market capitalization to GDP fronts,” says Fiachra MacCana, research head at the stock brokerage Saigon securities.
Some of the 800-plus companies on exchanges in Hanoi and Saigon now attract investors for their business savvy and transparent management. 

An example of both is the dairy producer Vinamilk.
But a lot have come under fire over patchy, slow accounting rather than the type a lot of foreign fund managers prefer to see. 

Then you get the not-so-international management standards of government owners. 

About 3,000 Vietnamese firms were partly state-owned as of 2015, in some cases after partial privatization under the Communist country free market reform efforts. 

Penalties for what Westerners would consider insider trading are light as well, says Frederick Burke, partner with the international law firm Baker & McKenzie in Saigon. 

“There’s no criminal consequences for things that we would consider market manipulation,” he says.