Vietnam is looking to follow in the footsteps of Qatar and the United Arab Emirates as the Southeast Asian nation pushes index provider MSCI (NYSE: MSCI) for a rare frontier-to-emerging reclassification.
Vietnam’s “State Securities Commission has formed a team to study what’s required for an upgrade of the nation’s frontier-market classification,” reports Nguyen Kieu Giang for Bloomberg, citing Nguyen Son, the commission’s head of market development.
By comparison to other emerging Asian economies, Vietnam’s is small. There have been periods in the past when the combined market value of stocks trading in Hanoi and Ho Chi Minh City has been less than major U.S. companies such as Apple (NasdaqGS: AAPL) and Exxon Mobil (NYSE: XOM).
The weighted average market value of the 30 stocks held by the $607.5 million Market Vectors Vietnam ETF (NYSEArca: VNM) is just $4.5 billion, according to Market Vectors data, firmly mid-cap by U.S. standards.
Vietnam is currently the eleventh-largest country weight in the iShares MSCI Frontier 100 ETF (NYSEArca: FM) at a weight of 2.82%. That is just over half the weight largest frontier markets ETF assigns to Kenya and a less than a third of the weight FM devotes to Argentina. [Frontier Changes Could Produce a Better ETF]
As Bloomberg notes, MSCI does not have Vietnam on its list of markets that could potentially be upgraded to emerging markets status. When the index provider revealed its annual market classifications in June, no frontier markets were listed as being in line for a possible upgrade to emerging markets status.
Vietnam’s emerging markets ambitions will not be easily rewarded. It took Qatar and UAE, the first Middle East nations to earn the frontier-to-emerging upgrade, seven years of being on MSCI’s watch list for potential promotion.
However, it is easy to understand why Vietnam wants the promotion. Various global banks forecast Qatar and UAE would see billions in added foreign direct investment upon being added to the MSCI Emerging Markets Index. Foreign investors have bought almost $228 million of Vietnamese stocks this year, a paltry sum compared to the $4.2 billion that has gone into Indonesian stocks and the $1.3 billion added to Philippine shares, according to Bloomberg. Inflows to Vietnamese stocks have been enough to send VNM to a 17.3% year-to-date gain. FM is up 14.5%.
One hurdle Vietnam must clear before becoming a credible candidate for the emerging markets upgrade is foreign ownership, an issue also faced by Qatar. In May, Qatar announced an increase of foreign ownership limits for stocks listed on the Qatar Stock Exchange to 49% from 25%. [Qatar ETF Rallies as Foreign Ownership Limits Increased]
Vietnam’s foreign ownership is 49%. Earlier this year, Vietnamese policymakers and the central bank revealed plans to lift foreign ownership limits across several sectors financial services and materials. Those sectors combine for 40.6% of VNM’s weight.
iShares MSCI Frontier 100 ETF
