FTSE upgrade opens door to 2 billion in passive fund inflows

On September 21, the financial sector officially reclassified Vietnam's stock market from Frontier to Secondary Emerging market status. This classification upgrade, announced at an online seminar on September 29, carries significant implications for capital flows into the Vietnamese market. Experts attribute the reclassification to improvements in market size, liquidity, infrastructure, and accessibility for international investors.

Le Duc Khanh, director of Analysis at VPS Securities, emphasized that the reclassification marks a pivotal moment in the development of Vietnam's stock market, opening the door for increased capital from international investment funds. The initial phase of capital deployment from passive funds is projected to see inflows of $130-150 million, with total expected inflows ranging from $1.5-1.8 billion as implementation continues.

However, Khanh clarified that these capital inflows will not be evenly distributed across all stocks, considering criteria related to market size and investability. Vietnamese market experts, including Nguyen The Minh from An Binh Securities, estimate that capital from passive funds could reach around $2 billion following the reclassification.

Active funds may also participate, though their capital deployment may be more unpredictable, contingent on market conditions, valuations, and asset allocation strategies. The reclassification is expected to expand the investor base beyond traditional Europe and Asia, opening new avenues for international capital. However, it's important to note that the reclassification does not guarantee immediate uniform distribution of capital across all stocks.

Some leading companies in finance, consumer goods, retail, energy, chemicals, and real estate sectors are likely to attract international capital, provided they meet specific market size and investability criteria. Despite the optimism surrounding the reclassification, experts caution that the substantial capital inflows should be viewed in the context of Vietnam's existing market scale.

Minh highlighted that while billions of dollars from passive and active funds represent a notable addition, the magnitude is still relatively limited compared to the overall size of the Vietnamese stock market. Furthermore, the reclassification should not be mistaken for reversing existing factors negatively impacting the market, such as foreign investors continuing to be net sellers in recent times.

Minh emphasized the need to differentiate the impact of additional capital from the reclassification against the backdrop of the capital already present in the market. He stressed that even with billions of dollars flowing in, this sum remains relatively small compared to Vietnam's current stock market scale. A critical aspect to consider is that Vietnam's stock market gains new sources of capital and expands its international investor base, but the challenge remains to ensure sustained and strong inflows of international capital.

This requires addressing global factors such as interest rate levels, bond yields, and inflation trends in major economies. Minh noted that when long-term bond yields remain high, the cost of capital for investment institutions increases, potentially making emerging market assets like Vietnam less attractive. Consequently, capital may shift towards defensive assets or return to investors' home markets.

To attract long-term capital and align with MSCI standards, Vietnam must continue enhancing market accessibility, completing clearing and settlement mechanisms, and improving the quality of listed securities. The central bank is also proposing a regulatory shift to allow foreign investors pre-licensing capital flows, streamlining project timelines while tightening oversight of cross-border flows and redefining control thresholds.

This regulatory adjustment aims to unlock Vietnam's next growth engine by restructuring capital channels beyond traditional bank credit, encompassing the equity market, corporate bonds, and institutional investors. Bank stocks in Vietnam are experiencing renewed interest due to the market upgrades and the influx of foreign capital.

However, experts emphasize that gains will be selective, driven by growth quality, profitability, and management excellence. In summary, the reclassification of Vietnam's stock market to Secondary Emerging market status represents a significant milestone in the country's financial development. While the immediate impact may not be transformative on a macro scale, it lays the foundation for attracting substantial capital inflows from both passive and active funds, diversifying the investor base, and positioning Vietnam as a more attractive destination for international investors seeking sustainable growth and higher standards in transparency, governance, and investor communication.