Private credit might be less attractive than it was last year as investors rush into the market, but there are sweet spots to be found.
Justin Kennedy, Hong Kong-based managing director at Citigroup Global Markets Asia, explains the first wave of foreign investors into a market includes many emerging-market specialists or global equity money managers that are looking for broad exposure. But existing indices, including the Vietnam All-Share Index promoted by the stock exchange in Ho Chi Minh City, pose problems because of limits on foreign ownership in any given stock.
All-share country indices often have too many stocks, particularly illiquid ones, to suit overseas investors.
Citi wanted to work with an independent index provider such as FTSE in order to be able to shape an index that it could track and replicate. The firm has worked previously with FTSE to develop indices in China.
The global markets desk plans to create delta-1 products (ie products that move one-on-one in line with the underlying security) such as swaps and index participation notes that are easy to hedge. It also wants to spin off more complex options, structured products and exchange-traded funds as the market develops, Kennedy says.
The Vietnam Accessible series of indices takes the top 80% of the stocks listed on the Ho Chi Minh City Securities Trading Centre based on full market capitalisation but adjusted for foreign ownership restrictions. Kennedy says in the end, the new index provides exposure to 71% of FTSEÆs existing Vietnam all-share country index and about two-thirds of the bourseÆs published index. The Accessible index encompasses 11 stocks.
This concentrated index has scope for expansion. The idea behind its construction was to make it dynamic so that it can reflect changes in the market, including the many privatisations expected to occur over the next year or so. This index will be reviewed monthly, as opposed to the usual quarterly frequency. There is a fast-entry rule for IPOs that account for 10% or more of the all-share index market cap.
Constituent stocks that see 2% or less of the available foreign-owned limit remaining are removed from the index. Those with 10% or more of the ceiling exceeded will be returned to the index û the wider band is to prevent stocks near their foreign ownership limits from seesawing in and out of the index, which would result in heavy transaction costs on rebalancing.
Kennedy says of the 11 current constituents only one, Vinamilk is near its foreign-ownership limit. He recognises the possibility that the stocks most in demand may be excluded from the index as theyÆve already hit their limits, but remarks: ôThat may be the case but those stocks are already gone; you canÆt buy it so what else could you do about it?ö
Until the government raises the ceiling for foreign ownership, or allows foreigners to trade holdings amongst themselves û something market sources in HCMC believe is being considered by regulators û then the market will continue to offer structural challenges to foreign investors. But at least now they have an index adjusted for the free float.
Regulators keep their eyes open on tightening insurance industry by introducing more detailed risk management requirements, which could bring pressure on smaller players.
China and India are more obvious choices for AustralianSuper to consider in Asia Pacific, but the super fund currently lacks the expertise and prefers to stick to the US and Europe.
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