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Vietnam tipped for admission to emerging market index after MSCI missteps

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Vietnam tipped for admission to emerging market index after MSCI missteps

Vietnam could be the next country to be included in the MSCI Emerging Market Index, attracting a possible $10 billion to the country's stock market, after years of rapid economic development.

The state's 1,400 listed stocks may be added to MSCI's emerging market watch list in June and be included in the $1.6 trillion index with a weighting of 0.7% by 2020-2021, according to Kevin Snowball, CEO at PXP Vietnam Asset Management. With a market capitalization of $180.32 billion, almost double that of Kuwait, which is also vying to be added to the index, and boasting more than three companies with market capitalization of $1.6 billion with 50% of that in free float, Vietnam meets many of the criteria for entry.

Should Vietnam be included, it could be a win for the MSCI, which added Saudi Arabia to its Watch List June 2017 in the expectation that Saudi Arabian Oil Co., or Saudi Aramco, would list its shares in the world's biggest IPO, and is in the process of readmitting Argentina even as the country battles runaway inflation and a collapsing currency.

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By placing Vietnam on the Watch List, it would give the country at least a year to complete its legislative process, while "at the same time, it would enable MSCI to burnish its reputation for picking winners," said Snowball. "A win-win."

However, Vietnam's road to inclusion is not guaranteed. While the ruling Communist Party of Vietnam has shown commitment to liberalizing its economy, there remains work to be done in terms of foreign ownership limits, restricted sectors and the simultaneous release of corporate announcements in both Vietnamese and English.

The government introduced Decree 60 in 2015, which was designed to allow foreign ownership to exceed the previous 49% limit a ceiling that remains in place in Saudi Arabia and for most Chinese companies. But the impact of the liberalization is limited by the restriction of which sectors it applies to. At present the number of restricted sectors total 236, although there are plans to reduce this to 20. "Only 34 or 35 companies have liberated," Snowball said.

"The MSCI is unlikely to include Vietnam," said Le Hong Lien, head of investment research at Maybank Kim Eng Vietnam. "It has not made enough progress on the three main points required."

Saudi Aramco listing

Saudi stocks will begin a two-step process of joining the emerging market index in June, with a provisional weighting of 2.6%. But the fading likelihood of a Saudi Aramco IPO, slated to value the company as much as $2 trillion, will likely damp international investors' enthusiasm for the country's stock market. Aramco further signaled that it was moving away from the stock market when it sold a $12 billion bond earlier this month.

MSCI appeared to have erred again when it decided in June 2018 to reclassify Argentina as an emerging market, having previously downgraded the country to frontier market in 2009 when capital controls were imposed. Argentina's reintroduction is due to be effective in May, but the economic crisis in 2018 hit U.S. dollar based investors hard, and volatility is expected in advance of elections in October.

From communism to market economics

By contrast, Vietnam's economy grew at an average rate of 6.6% between 2014 and 2018 as manufacturing output surged. It brought its fiscal deficit down to 3.6% in 2018 from 5.1% in 2013, while the country's foreign exchange reserves are at an all-time high of $70 billion, according to Maybank Kim Eng.

Having been a centrally planned economy in the wake of the Vietnam War with the U.S., the Communist Party of Vietnam was forced into a series of reforms in the 1980s. A bout of hyperinflation, compounded by a reduction of Soviet aid, resulted in the Doi Moi reforms of 1986 which replaced the system with a socialist-oriented market economy.

If Vietnam is included in the emerging market index, it would mark a step change for the country's stock market. The potential addition of $10 billion of capital as investors that track the index adjust their holdings compares with net investment in the VNIndex of $1.8 billion in 2018 and $800 million in 2017.