Vietnam will remove a requirement for overseas investors to fully pre-fund equity transactions, adding to the country’s efforts to increase its chances of a FTSE and MSCI market classification upgrade to emerging market status. The regulatory change, effective Nov. 2, 2024, should resolve a long-standing barrier that has prevented the nation from being upgraded from its current frontier market status by both FTSE and MSCI. The current 100% prefunding requirement for overseas investors has hindered large funds from fully investing in the Vietnam market.

Under the announced change, local brokerage firms will assess the risk and determine any pre-funding ratio requirements for their foreign institutional investor clients when placing orders. Regardless, client accounts must be funded by 9:30am on T+2 to complete normal trade settlement. If an overseas investor fails to complete the payment, the liability will be assumed by the broker.

“We think the changes would enable FTSE to upgrade Vietnam to Emerging markets within the next 12 months, leading to more than $500mm of passive inflows into the market and potential positive revision from MSCI,” J.P. Morgan Market Research said in a note.

Even with the removal of the pre-funding hurdle, most publicly traded Vietnamese companies are still subject to foreign ownership limitations (FOL). For example, the combined stake of foreign investors in any listed bank is limited to 30% and 49% for securities listed in the real estate, oil & gas, and construction materials sectors. When a listed Vietnamese company has “reached its FOL limit” (i.e., the proportion of shares available to foreign investors have all been acquired by foreigners), and a foreigner wants to buy more shares in the company, the purchaser must buy shares from a foreigner that already holds them. The foreigner that holds these shares typically demands a premium above the prevailing market price when selling their shares, triggering a mark-to-market loss for the new investor.

Sourcing liquidity presents different challenges in Asia than in the US and Europe, with Vietnam currently trading around USD$800mm on average per day across the entire listed market. On-the-ground and live trading experience is essential when navigating difficult liquidity landscapes. Firms investing in Vietnam should ensure their trading desk is well-versed in the idiosyncrasies of the Vietnam market while maintaining relationships with local and foreign brokers to benefit from color on discreet blocks available, as well as impactful news and flows. These lines of communication carry significant value to market participants. Additionally, traders must pay special consideration to information sharing. Careful management of order flow is important in all markets, especially in Asian emerging markets where governance and event risk can be significantly more common and corrosive, driving intraday volatility.

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