Vietnamese Stocks Get Cheaper, But There Aren’t Many to Trade

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A recent retreat in Vietnamese stocks has brought the market's valuation back below its five-year average. While that's the cheapest level in a year, tapping this opportunity is easier said than done.

For any investor who'd like to take advantage of the country's economic growth, there is a sticking point to bear in mind: tight liquidity. That's because issues like overseas ownership limits, small free-float levels and strong state control have left few shares for foreigners to trade.

The good news is the country has taken several measures to tackle the problem. It has relaxed foreign-ownership limits for some industries and has been speeding up the process of reducing government stakes in companies. It also started a derivatives market in 2017 and introduced more products this year.

Still, trading volume in Vietnam's stock market remains tiny compared with other Southeast Asian countries, even for the nation's large caps.

While foreigners cherish the opportunity to invest in Vietnam shares, that's actually what's made trading worse. The tight liquidity of some top stocks is partly the result of major overseas owners holding their stakes for the long term, said Tim Love, a director for emerging-market equities at GAM Investments. High execution costs and fears of not being able to access that same foreign ownership tranche again discourage trading, he said.

Hopes that privatization will help market liquidity are also dimming. While the Vietnamese government has made a push to accelerate the revamp of rules for state-owned enterprises, the privatization process has been slowing and concern is now rising that it'll miss a target to divest 60 trillion dong ($2.6 billion) between 2017 and 2020.

Share sales of state-owned enterprises fetched $147 million in the past 11 months, or 32% of the value last year, data compiled by Bloomberg show. That's because the nation didn't have marquee companies offering stakes, according to Vietnam's Ministry of Finance.

“It will definitely make it easier if the state control gradually recedes,” said Felix Lam, a senior manager of Asia Pacific equities at BNP Paribas Asset Management in Hong Kong. He doesn't hold Vietnam stocks because the volume is too low for his mandate.

For investors to place more bets in Vietnam, they'll need to have a better sense of what the nation is doing to boost liquidity, and what other market-related measures it's looking at, according to Lam. “When you have visibility, you have a much higher chance to be re-rated and enjoy the foreign flows,” he said.

That'd be welcome news for a market that's now the world's most oversold among major ones.

Overseas traders invested more than $230 million in Vietnamese shares since January, data compiled by Bloomberg show. While that's better than the withdrawals for countries such as Malaysia and Thailand, the inflows for the nation's equities are much smaller than in the past two years.

Despite all this, GAM Investments' emerging-markets team is overweight Vietnamese stocks. It's sticking to shares that are relatively more liquid, holding them for a longer time -- especially those that have positive free cash flow, Love said.

“Liquidity issues do not imply the opportunity isn't real.” he said. “The market has been de-rating recently, which is a wonderful opportunity to go the other way and buy. In our view, it is now correctly priced and under-appreciated.”

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