Vietnam is a frontier market for good reason

ANYONE visiting the vibrant and bustling metropolis that is Ho Chi Minh City would hesitate to call Vietnam a frontier market.

There are growing calls for the Southeast Asian economy to be included in the MSCI Emerging Markets Index. After all, even Argentina, which is seeking another IMF rescue, is on the watch list for an upgrade. And Vietnam has better liquidity than the Philippines, which is already there.

Hopes that Vietnam may soon make the classification helped its stock market to become Asia’s best-performing last year.

But MSCI may have good reason for keeping Vietnam in frontier market territory.

For one, its share market isn’t ready for active fund managers, who struggle to beat the benchmark. Thu Nguyen, a managing director at VinaCapital Group Ltd., is seeking to raise $30 million for a fund that would invest in small-cap firms. She’s telling her investors to look past the index.

Large moves by a few companies can swing the broader market big time. Five companies currently contribute to more than 40% of the benchmark Ho Chi Minh Stock Index.

Last week, the nation’s exchange welcomed its newest blue chip — Vinhomes JSC, a luxury residential developer spun off from Vingroup JSC. Vinhomes raised $1.4 billion in the country’s biggest IPO.

When Vingroup’s management were wooing investors, the company’s shares were eerily calm, even as other stocks joined the global sell- off. Vinhomes accounts for about 65% of Vingroup’s revenue. If its shares were performing poorly, one could hardly blame fund managers for not wanting to get into Vinhomes.

After Vinhomes’ debut, Vingroup sold off, causing the broader index to dip. Now, Vietnam’s image looks tarnished because large IPOs are supposed to fire up, not sink, the market.

Saigon Beer Alcohol Beverage Corp., which counts Thai Beverage Plc as a controlling shareholder after a deal last year, is another example.

When news of the stake sale first surfaced in August, Saigon Beer’s shares began to climb, touching a record high in November. The buying frenzy propelled Saigon Beer to the No. 2 spot on the Ho Chi Minh Stock Index, with a market weight of 8.6%.

Value investors were faced with a conundrum. Clearly Saigon Beer was overvalued — the stock had priced in Thai Beverage’s control premium — but selling could result in lagging the benchmark in a bull year.

Then there are stocks like Hanoi-based FLC Faros Construction JSC.

At its peak, the construction and civil engineering services provider was the sixth- largest firm on the index, with a 4.7% weight. That was before its shares plunged 55% since January, wiping it off the radar. When FLC Faros, which isn’t followed by equity analysts, was rallying for no apparent reason, were fund managers supposed to pile in, or play it safe?

As a significant manufacturing hub, Vietnam has one of the best growth stories in Asia. But with a few companies able to distort the market, it’s no country for oldschool investors.