Foreign investors have been increasingly selling off Vietnamese stocks in recent weeks, driven by growing trade risks for the export-dependent nation. This trend persists despite the anticipated market upgrade from frontier to emerging market status by FTSE Russell later this year, a move expected to boost valuations.
Vietnam’s significant trade surplus with the United States and its higher import duties have placed it in a vulnerable position, facing potential U.S. tariffs as the current administration seeks to rebalance trade. Analysts point to these factors as key contributors to the recent market volatility.
According to stock market data, foreign investors divested 6.4 trillion dong ($251.18 million) from Vietnamese stocks in January, representing a nearly threefold increase in net selling compared to December. While this outflow surpassed that of the larger Indonesian market, it remained lower than those observed in major Asian markets like India and South Korea.
The selling pressure intensified in February, with foreign investors shedding 4.2 trillion dong in the first week alone. This trend continued throughout the month, particularly impacting steelmakers following the announcement of 25% tariffs on steel imports into the U.S. by the Trump administration. Vietnam is a major steel supplier to the U.S.
The persistent selling has overshadowed the potential benefits of a FTSE upgrade. Vietnamese officials and analysts widely anticipate a reclassification from frontier to emerging market status later this year. This upgrade is expected to significantly enhance the market’s attractiveness to foreign investors.
In 2018, FTSE placed Vietnam on its watchlist for a potential upgrade. Since then, the country has implemented crucial reforms, including the November removal of full prefunding requirements for foreign investors’ equity transactions—a key prerequisite for the FTSE upgrade.
FTSE is scheduled to release an interim report on monitored markets in March and announce its decision regarding Vietnam’s upgrade in September.
Both FTSE and MSCI, prominent index providers, upgrading Vietnam could attract an estimated $5 billion in additional funding to the country’s stock market, according to the World Bank. The anticipation of rising valuations associated with the upgrade was expected to draw in activist investors even before the official announcement.
However, this anticipated inflow has yet to materialize. The key prefunding reform coincided with the U.S. presidential election results and a global outflow of foreign funds from emerging and frontier markets, dampening investor sentiment. November witnessed the highest foreign net selling of Vietnamese stocks since June, reaching 12 trillion dong.
In conclusion, despite the promising prospect of a FTSE upgrade and the potential for increased foreign investment, Vietnam’s stock market currently faces significant headwinds due to escalating trade tensions and global market volatility. The anticipated benefits of the upgrade have been overshadowed by the prevailing uncertainty, leading to a sustained period of foreign investor selling. The coming months will be crucial in determining whether the potential for long-term growth can outweigh the immediate challenges facing the Vietnamese market.
