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Thursday, December 3, 2020

Opposing foreign capital flows

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While active investing tends to pull out of the local stock market (except for some put-through deals with an extraordinary value like the one cut at VHM), passive investing through exchange traded funds (ETFs) in Vietnam is on the rise in recent months, especially after the launch of VFMVN Diamond.

Like its counterparts around the world, under the impact of the Covid-19 pandemic, Vietnam’s stock market experienced wild fluctuations in the first nine months of this year. Specifically, the VN-Index plunged headlong in the first three months but gradually recovered in the next two quarters, and has almost regained its loss thanks to new cash flows from domestic investors. Consequently, at the end of the final session of the third quarter, the VN-Index stood at 905 points, only down 5.8% compared to the end of 2019. Contrary to the VN-Index, the HNX-Index even increased by 30% to 132.9 points. Similarly, the UPCoM-Index grew 9.14% to 61.7 points.

However, the biggest drawback to the market in the past nine months was the discernible trend of net selling among foreign investors on all three exchanges—the HOSE, the HNX and the UPCoM. All in all, foreigners bought 4.1 billion shares, and sold nearly 5.2 billion, recording a buying and selling value of VND138.8 trillion and VND144.5 trillion, respectively. The total net sale volume was 1.1 billion shares, equivalent to a net selling value of VND5.7 trillion. On the HOSE alone, foreign investors net sold nearly VND2.4 trillion. One thing remarkable about the transactions that involved foreign entities on the HOSE is that nearly VND22 trillion was net bought with foreign cash adopting the put-through method. Therefore, excluding put-through deals, foreign investors net sold more than VND24.38 trillion (over US$1 billion) via matching transactions in the first nine months of the year.

VHM took the lead in net buying value totaling some VND18.36 trillion, mainly due to the put-through deal worth over VND19.87 trillion done in mid-June with a group of investors led by the U.S.-based investment fund Kohlberg Kravis Roberts (KKR) as the buyer. One of these investors is Temasek, a Singaporean investment fund which has completed the acquisition of more than 200 million VHM shares with a transaction value of VND15.1 trillion, equivalent to US$650 million.

Second in the net buying list of foreign investors is the ETF certificate FUEVFVND grossing more than VND2 trillion, again mainly through put-through deals (VND1.83 trillion).

PLX and PGD were other two shares net bought by foreigners in the first nine months, over VND1 trillion each, also with put-through as the primary method.

There is also the ETF certificate FUESSVFL with a net buying value of VND718 billion.

On the contrary, nearly VND3.2 trillion worth of VIC shares were net sold by foreign investors, followed by HPG with over VND2.8 trillion. VJC and VRE also recorded a net selling value of more than VND1 trillion each.

Contrast between active and passive investing

From the above development, it is apparent that there is a sharp contrast between foreign active and passive investing, as well as between order matching and put-through transactions. While active investing seems to pull out of the local stock market (except for some put-through deals with an extraordinary value like the one cut at VHM), passive investing through the ETFs in Vietnam is on the rise in recent months, especially after the launch of VFMVN Diamond. The reason is VFMVN Diamond’s portfolio is made up of fundamentally good stocks whose foreign ownership limits have been reached. This has always been a “dish” favored by foreign investors. The success of VFMVN Diamond suggests foreigners are still waiting to pour their capital into Vietnam provided there are quality investment products that meet their taste. This may lead to the boom of ETFs in Vietnam in the coming time.

However, it should also be noted that ETF capital flows are characterized by “swift entry, swift exit.” Currently, Vietnam is a bright spot of GDP growth on a global scale. Furthermore, Vietnam has put the pandemic under control nationwide. These are two prominent advantages that make Vietnam’s stock market a magnet for “hot” capital flows, which benefit greatly from cheap money flows as central banks worldwide forcefully cut interest rates and go ahead with quantitative easing (QE).

In such a context, will such capital flows soon make a U-turn when global risks escalate? The answer is: probably, once uncertainties in global markets worsen. This scenario would likely unfold if the second wave of Covid-19 proved more severe than expected whereas the flu season is coming soon in Europe and North America. Alternatively, the trigger could be the uncertainties fueled by the U.S. presidential election over the next four weeks, or simply the fact that President Donald Trump has recently infected with SARS-CoV-2. All these variables, should they come together at the same time, may prompt the “hot” capital flows to quickly retreat.

Regarding active funds, the majority of them are closed-end, i.e. capital is mobilized in the beginning and they will only stop operating after a certain period of time. Investors are not allowed to withdraw their money prematurely. Raising new capital proves quite difficult at the moment though, as the level of uncertainty in the world economy remains high. However, in the coming time, the stock market of Vietnam can still expect some big deals via which private equity funds (P/E funds) inject their capital into industry leaders with great potentials for growth on the bourse. The typical candidates are VIC, Masan or some joint stock banks looking to sell their shares to strategic partners.

By Dang Linh

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