Less flow of foreign capital in 2020

SGI

Currently there is not a very high possibility of foreign investors pouring money into emerging markets and frontier markets. However, one thing is certain, foreign investors will be selective and choosy when investing, and some markets may be more preferable than others.

Illustrative photo.

Illustrative photo.

Mobilizing money will be difficult

Although foreign investors continued net buying in the last two years during 2018 and 2019, most activities of net buying took place through put-through transactions, while matching orders recorded net selling, directly affecting the VN Index. However, the net-selling wave of foreign investors slowed down when the level of net selling decreased sharply from VND 16,000 bn in 2018 to around VND 1,000 bn in 2019. Even foreign investors strongly net bought with nearly VND 3,000 bn, only after the first four months of 2019 and only turned to net selling due to tensions related to the ongoing US-China trade war.

In 2020, foreign investor activities on the stock exchange may be more positive because of some factors such as, key ETFs that are likely to continue attracting money from Thailand and Korea; Vietnam stock market could increase its proportion in the MSCI Frontier 100 basket to 30%; Kuwait is transferred to the MSCI Emerging Market basket; US-China trade war cools down; and expectations to loosen foreign room in a group of financial stocks has run out of foreign room.

Meanwhile, mobilizing money from domestic investors may face difficulties when other investment channels such as corporate bonds and gold or real estate are slightly better on VN Index in 2019. Although the State Bank has lowered the ceiling interest rate for short term, it is a positive point for the market to attract cash flow from the bank with interest rates for long term at still high level. In contrast, the positive point to attract internal cash flow in 2020 is high profit growth and recovery of capital divestment and equitization.

ETF attracts capital

In the past two years, E1VFVN30 and VNM US ETF have been two main ETF funds that are attractive in the market. It is likely that E1VFVN30 will continue to attract cash flow from two key investors, Thailand and Korea. The reason is that interest rates in these two countries is lower after the central banks of these two countries implemented interest rate cuts last year. Especially, if you look at the movement of the main indices, the VN Index was up 8.3% and has brought a higher profit in the past year, compared to Korea's KOSPI up 6.3% and SET of Thailand which only increased by 0.6%.

One of the factors expected by investors is the cash flow of VNM US ETF when S&P 500 has had a strong year, up 26%. This impressive growth limits the attractiveness of other markets. Investors from Europe and the US may tend to invest in bottom-up approaches instead of ETFs in 2020. Not only that, the proportion of Vietnam in the marginal MSCI basket will be significantly increased at the end of May. There are currently no ETFs that simulate this set of indicators, but there are a number of marginal funds that are compared to the marginal MSCI, so funds can selectively buy large and liquid stocks in Vietnam.

The attraction for ETFs also came from the efforts of regulatory agencies, by the launch of new index sets such as VN Diamond, VN Finselect and VN Finlead in November 2019. These indices are expected to be created by ETF funds to attract investors' investment in specific industries and sectors. For example, VN Finlead and VN Finselect are built on the HOSE financial industry index that is the VNAllshare Financials Index, and the addition of regulation in limiting the capitalization rate of component stocks to 15%. According to the plan, ETF funds simulating these sets of indicators will be signed for approval in 2020. Recently, SSIAM Fund Management Company had been signed to approve the SSIAM VNFinlead ETF and expected to conduct an IPO with an expected scale of USD 25 mn to USD 30 mn.

Expected divestment

In addition to the above factors, if divestment and equitization can be active again in 2020, the market can attract more money from foreign investors. The process of divestment and equitization took place slowly throughout 2019, and only two enterprises were on the list according to Official Letter No. 991/TTg-DMDN and one enterprise under Decision No. 26/2019/QD-TTg of the Prime Minister performing equitization. Therefore, from 2017 to now, only about 28% of the plan has been equitized and there are still 92 enterprises that need to equitize before 2021. Meanwhile, only 13 enterprises have withdrawn their capital to gain VND 1,839 bn according to Decision No. 1232/QD-TTg. As far as accumulation from 2017 to now, the number of enterprises divesting only reached 8% of the plan.

In view of this fact, and after receiving comments from related parties, the Ministry of Finance amended the bottlenecks in two Decrees No. 126/2017/ND-CP and No. 32/2018/ND-CP and submitted to the Government. In a positive case, the draft may be issued and take effect at the beginning of 2020, when it is expected that the divestment and equitization activities will take place in the second quarter of 2020. However, the workload in 2020 will be very huge while the completion rate of the divestment and equitization plan for the period 2017-2020 is low. Therefore, it is likely that only a few large equitization and divestment deals will probably take place in 2020, not as massively as in 2017.

On the list of enterprises that need to be equitized according to Government policy, are a number of general corporations and large corporations. Specifically, the State Capital Management Committee proposed to divest 15% of Vietnam Airlines (HVN) in 2019-2020 and increase capital in 2019-2025 to reduce the capital ratio of the state down to 51%. In addition, a few large companies equitized in previous years such as Binh Son Refining and Petrochemical Joint Stock Company (BSR) and PetroVietnam Oil Corporation (PV OIL). PetroVietnam Power Corporation (POW) also can continue to divest in 2020 after completing the finalization after equitization. In terms of equitization, Power Generation Corporation 1 (Genco1) is choosing an appropriate time to determine business valuation, while Power Generation Corporation 2 (Genco2) has approved consulting documents from contractors.

Translated by Hoa Nam

Nguyen Tien Hoang, Rong Viet Securities Company (VDSC)

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