Stock Market Cap Hard to Reach 100% GDP

2:20:33 PM | 10/1/2020

Given its progress achieved, Vietnam's stock market has gradually affirmed its role financing the economy, with the capitalization to GDP reaching 81% at the end of September 2019. Will the remaining 19% be filled in 2020 to realize the goal of 100% GDP?

At the Stock Market Development Conference held in late February 2019, Deputy Prime Minister Vuong Dinh Hue assigned the target of raising the stock market capitalization to GDP to 100% in 2020 from 72% in late 2018 to the Ministry of Finance and the State Securities Commission of Vietnam. This is considered a tough task, because Vietnam's stock market is being affected significantly by complicated global political, economic and financial developments.

2020 is the 20th operational year of Vietnam's stock market. This milestone opened an effective medium and long-term funding channel for development investment and helped speed up the country's industrialization and modernization. Compared to the time of joining the World Trade Organization (WTO) in January 2007, the Vietnamese stock market has to date obtained many important achievements.

The market has witnessed growth in all aspects, from quantitative criteria expressed through such figures as market capitalization, trading value, listings and investors to qualitative criteria expressed through the professionalism of market members.

Together with the robust development of the stock market, more and more global investment funds have invested in the market, especially in recent years, thus strongly increasing the value of foreign portfolio investment flowing into Vietnam’s equity.

However, according to experts, in order to bring Vietnam's stock market capitalization to GDP to 100% in 2020, the VN-Index will need to rise by 35%. This goal is too difficult. According to experts, Vietnam needs to increase the supply of listed stocks by accelerating privatization and divestment process which will result in mandatory stock listing and encouraging private enterprises to float their shares on the stock exchange.

Mr. Nguyen Hieu, General Director of Viet Dragon Securities Corporation, said that the market capitalization is at about VND4,458 trillion (US$198 billion) and the liquidity averaged VND4,567 billion a day in November 2019. Assuming that the economy expands 6.8% and inflation is curbed at 4% according to the Government’s goal in 2020, the market capitalization needs to increase at least 35% in 2020 to reach 100% of the country’s GDP. However, this is not easy because, looking back on the market from 2010 to the present, only in 2017, the VN-Index climbed over 35% (rising by 48%).

This remarkable growth in 2017 was attributed to many new giant listings such as VJC, HVN, PLX, VPB, and VRE. Big divestments were also conducted in the year, including in VNM and SAB. VNM and SAB advanced 66% and 26%, respectively, from the end of 2016. Accordingly, IPOs and divestments in some of these large enterprises accounted for more than 50% of added market capitalization in 2017.

Therefore, increasing equitization and divestment is prerequisite to achieve the goal of market capitalization to GDP, he said.

2020 is the last year in the Government-backed equitization and divestment plan. A series of giant companies are on the list of equitization and divestment, for example Vietnam Motors and Agricultural Machinery Corporation (VEAM), Petrolimex, Vietnam Bank for Agriculture and Rural Development (Agribank), Vietnam National Chemical Group (Vinachem), Power Generation Corporation 1 (Genco1), Power Generation Corporation 2 (Genco2), Vietnam Mobile Telecom Services One Member Limited Liability Company (Mobifone) and Vietnam Cement Corporation (Vicem).

The market capitalization of these large enterprises is estimated at US$8 billion. Accelerating equitization and divestment of these businesses will significantly increase Vietnam’s stock market capitalization and bring the market capitalization to GDP ratio to 100% by 2020. In reality, most State-owned enterprises have better business results after they launch IPOs.

However, most importantly, the market needs to develop more stably and sustainably. According to analysis of Viet Dragon Securities Corporation, the market peaked in April 2018 and plummeted shortly thereafter. The free float and stock turnover were only average relative to other regional markets. Moreover, more than 70% of trading value came from individual investors who tend to invest in the short term. Therefore, when the market falls sharply, it will affect investor confidence. The number of securities accounts continues to increase but it reaches only about 2.4% of the Vietnamese population.

For that reason, according to experts, this is a challenge but also a potential growth driver for Vietnam's stock market. A stable market will attract more investors to participate, thereby indirectly affecting the index growth. Besides, only a good market will motivate businesses to list their stocks on the local exchange.

Bich Anh (Vietnam Business Forum)