Why do foreign investors continuously sell Vietnamese stocks?

The net selling pressure of foreign investors on the Vietnamese stock market still shows no signs of abating. In the first trading session of the week, foreign investors sold nearly 3,400 billion VND, while only disbursing 2,000 billion VND – the lowest level since the beginning of the year. The focus of sales focuses mainly on industry-leading codes such as VPB, HPG, and SSI.

This development extended the net selling chain to the 13th consecutive session, thereby raising the cumulative accumulation for the month to about 16,750 billion VND. Since the beginning of the year, foreign investors have withdrawn a total of VND 30,500 billion from Vietnamese stocks, an increase of about 18% over the same period. According to observations of the analysis team of VNDirect Securities Company, foreign investors often sell strongly when the market approaches a short-term peak and the pressure focuses on large capitalization groups.

Last year, foreign investors recorded a record net withdrawal of VND 135,000 billion. The main reason at that time was the sharp increase in the exchange rate because of the interest rate difference between USD and VND. This happened when the US applied a tightening monetary policy, while Vietnam loosened it.

With the recent sale, Ms. Ton Minh Phuong – General Director of Vietcap Securities Company (the leading enterprise in the foreign institutional brokerage market) said that there are many reasons besides the exchange rate factor.

First, for global-scale investors, holdings in frontier markets like Vietnam often account for a very small proportion of total assets. When risks increase, they tend to sell assets in these markets first because they are not important. Not to mention, in the past few years, these markets have had good profitability performance, thus promoting the realization of profits.

Ms. Phuong said that the lack of new “goods” is also a factor why Vietnamese stocks have not been able to retain foreign capital. The market basket is not yet diverse, currently there are only a few big names and are locally concentrated in a few industries. However, the operator is trying to overcome this problem by shortening regulations on the post-IPO listing time and encouraging enterprises with State capital to go public.

The last factor, according to the head of Vietcap’s executive board, is a relatively positive signal due to the “blood change” of investors. Vietnam is currently in the frontier market group and is expected to officially upgrade to emerging in October. Funds investing specifically in frontier markets must therefore restructure their portfolios to compensate for incoming cash flow from emerging funds.

According to Mr. Tyler Nguyen Manh Dung, Senior Director of Market Strategy Research, HSC Securities Company, the ownership ratio of foreign investors has dropped to a record low of about 14.6%, compared to over 20% more than two years ago. He believes that the net withdrawal of foreign capital does not simply come from exchange rate pressure, but is more likely associated with the process of repositioning risks and distributing capital globally. Furthermore, the net selling status of foreign investors is in agreement with regional markets, showing that this is a general trend, not a specific concern for Vietnam.

The analysis team of MB Securities Company (MBS) commented that foreign capital also left emerging markets in the region. Data lead analysis team of Bloomberg shows that foreign investors are approaching the largest monthly capital withdrawal since 2009. Since the outbreak of war in the Middle East, foreign investors have sold about 52 billion USD in stocks in Asia. The scale of capital withdrawal this month currently exceeds the “flight” in March 2020 when the Covid-19 epidemic broke out and is double that of June 2022, after the war in Ukraine broke out.

“Energy import-dependent markets such as Taiwan, South Korea and India are leading the current sell-off wave. The capital withdrawal trend reflects the direct impact of oil prices on net energy importing economies, mostly in Asia,” commented the MBS analysis team.

Short-term developments are pessimistic, but most experts expect foreign capital flows to return to Vietnam in the last months of the year. FTSE Russell’s mid-term review (announced on April 7) is expected to be an important milestone for foreign capital to reverse.

“In terms of the internal economy, I believe Vietnam is still attractive to global capital flows. FTSE Russell’s market upgrade will help foreign capital flow back in the remainder of this year,” Ms. Phuong said at Vietcap’s shareholder meeting on the afternoon of March 30.

From the perspective of foreign funds, Mr. Petri Deryng – Portfolio Manager of PYN Elite Fund (Finland) – said he still maintains an optimistic view on Vietnam’s prospects as well as the profit potential of the stock market in the short, medium and long term. Writing in a letter to investors, he said that after Vietnam was confirmed to be upgraded by FTSE Russell, index-tracking funds would begin disbursement into stocks on the Ho Chi Minh City floor. The trend will be even clearer if MSCI also puts Vietnam on the watch list for upgrade at its regular meeting next June.

Some domestic securities companies estimate that there will be about 6-8 billion USD of foreign capital poured into Vietnam after the upgrade. HSBC’s global investment research department believes that in the most optimistic scenario, the number could reach 10.4 billion USD.

However, the capital disbursement process of foreign funds can take considerable time, usually from 1-1.5 years. The disbursement roadmap is divided into several stages and depends on the nature of each type of fund.

Specifically, active funds have high flexibility and can participate earlier, often being the “go-ahead” cash flow whenever there is positive information. Meanwhile, passive funds (ETFs, index funds) are often bound by reference indexes, so they have to wait until Vietnam is officially upgraded to restructure their portfolio, and need an additional 3-6 months to complete capital allocation.