A few weeks ago I had the chance to spend some time exploring the Vietnamese city of Saigon – or more precisely, District 1 of Ho Chi Minh City (HCMC). Without doubt the place is the hottest ticket in town for investors targeting the Mekong region. And it is easy to understand why.
This sprawling southern city, located in the fertile Mekong delta, is home to nearly 10 million people and serves as primus inter pares among Vietnamese cities. Not only is it buzzing with entrepreneurs, expatriates and tourists but it also accounts for an outsized proportion (15% vs. 10% of the population) of the country’s GDP and foreign direct investments. To top it off it is the home to the country’s leading stock market, the HCM Stock Exchange (HOSE).
Of note the others stock markets are Hanoi Stock Exchange (HNX) and Unlisted Public Company Market (UPCOM) are minnows in terms of market cap and daily turnover.
In 2016, HOSE gained 16% in $-terms, compared with MSCI Frontier Market 0% and MSCI Emerging Markets Index 2.5%.
The basics of the boom story are easy to summarise.
Vietnam has a population of around 90 million people, of which nearly two-third are below 35-years old (prime working age), equipped with a literacy rate of more than 95% and good education (in the latest OECD report Programme for International Student Assessment, PISA, Vietnamese students moved up to 8th place globally from 17th in the latest assessment in 2012 – notably ahead of Hong Kong and China, which came in at 9th and 10th, respectively) and an urban population of nearly 40%.
Growth drivers are primary exports, consisting of electronics (30% of all), garments & footwear, crude oil (global no.1), coffee (global no. 2) and natural rubber (global no.3).
The economic growth is supported by foreign direct investments, export and domestic demand. Gradually future growth drivers will rely on higher-value added manufacturing, burgeoning middle-class and urbanisation.
As always a bull market story comes with some kinks. A long-term friend pointed out that as a regional Asia fund manager he finds it challenging to conduct company visits there as many managers don’t speak English, many questions receive inadequate answers and many brokers lack in-depth experience and have a bullish bias.
I think these are generic problems, particularly for investors choosing investments in frontier markets.
However less common is the challenge linked to its legal system.
Vietnam law is mainly based on French civil law and some communist legal theory. The basis of the French “Civil Law” system is based on a key document drawn up in 1804, known as Code Civil or Code Napoléon, basically an updated version of ancient Roman law. In contrast English-speaking countries and most former colonies/protectorates such as Myanmar use a system based on “Common Law”.
What this means in simple terms is that common law systems are ones that have evolved over the ages, and largely based on consensus and precedent. Civil Law in contrast are promulgated by the government and passed as laws when approved by the parliament. In other words the former is deemed more flexible as it can quickly adapt to circumstances without the need for parliament to enact legislation. This is the reason majority of business contracts covering international businesses follow English-based legal system.
One great example of this is the odd two-stage model of privatisation. When a Vietnamese SOE is to be privatised it is first ‘equitized’ meaning to sell shares, bonds or fund certificates to a group of private investors. After that, it can make the transition to a publicly owned entity whose shares can be traded on the local bourses. The problem is that transition can take a long time, which frustrates foreign investors.
The good news is that these issues are known and debated fiercely among policy-makers, and some pundits believe legislation could change as early as late 2017 or in 2018.
Another positive initiative is the drive to sharply increase the number of SOEs equitized and listed over the next few years.
There are also talks about merging HOSE and HNX. If implemented it would allow the 1.6 million domestic investors and hundreds of foreign institutions smoother access and lower administration costs to trade stocks. However what is missing is that I haven’t heard anyone suggesting that Vietnam is moving away from being an “ID market”, which requires foreign investors to have securities trading codes prior to assuming trading. This can take a few weeks and requires onerous and costly paperwork.
However, the really exciting thing to watch out for is the magic wand from MSCI Inc., the provider of the world’s most followed indices for professional investors.
Vietnam aims to be upgraded from MSCI Frontier Market to MSCI Emerging Market Index.
To achieve this Vietnam would need to accommodate significant increases in market accessibility, foreign ownership rules, ease of capital flows and efficiency of operational frameworks.
Some sanguine observers think that by the end of 2017 Vietnam could meet such requirements, allowing it to be formally included in the MSCI Emerging Index by 2019/20.
Time will tell, but the I believe the motion is in place for a virtuous cycle of more access to more (and bigger) stocks, a more liquid market, more scale, more interest encouraging further inflows.
What happens in Vietnam has a direct impact on Myanmar.
As the biggest and the most successful economy in the Mekong sub region, Vietnam acts as the beacon for foreign investors interested in this part of Asia. Its moves, successes and failures are being closely monitored and evaluated.
I also think Vietnam will trigger a ‘keeping up with the Joneses’ scenario where structural changes resulting in positive economic changes and investors’ reactions will be compel other neighbours, including Myanmar, to follow suit.
This is particularly true for the development of the three Vietnamese stock markets – HOSE (2000), HNX (2005) and UPCOM (2009) – which can serve as a useful roadmap for the nine-month-old Yangon Stock Exchange.
There are an abundance of lessons to be learned in terms of regulations allowing foreigners access to stock markets, privatisations of SOEs, listing requirements and index inclusion (MSCI Frontier Market).
A lot of naysayers will say that all this is just fancy talk. Perhaps, but I have recently met people who are actively advising behind the scenes, where they share the best practices among Mekong region stock markets. After all, the growth drivers for Myanmar are not too different from Vietnam and it is in its self-interest to enact changes.
Perhaps a less well known fact will come to help. HCMC is a ‘sister city’ with Yangon since 2012. I would love to see some friendly sibling rivalry over the next few years…
Source: Myanmar Business Today