Vietnam’s Dragon Capital plans to launch open-ended funds this year through VietFund Management, its domestic joint venture with Sacombank. It is set to bring out both equity and fixed-income products, with the latter likely to come first.
At present, foreign-incorporated asset management firms are excluded from the domestic mutual funds industry. There’s a World Trade Organisation commitment to remove that exclusion, but when is unclear, notes Dragon Capital's chief executive Dominic Scriven.
Others have suggested it will happen this year, such as Mark Browning, Asia managing director of Franklin Templeton Investments. But no local players have yet launched any open-ended funds either.
Vietnam has fallen off the radar of many foreign investors in the past few years, thanks largely to poor equity market performance that has seen the Ho Chi Minh Stock Index sink more than 62% since September 2007, from 1,106.6 to 416.65 points at close on June 4.
During the global financial crisis the country “had its own crisis” and took time to get on top of what the drivers of it were, says Scriven.
But he notes that process has been in full swing for more than a year now, with the government moving to close off credit, tackle misallocation of capital and stabilise the currency.
The thinking is that many past problems in Vietnam’s economy came from credit markets expanding too quickly. Hence if the banking system provides less financing, it will need to come from debt and equity capital markets, adds Scriven, who expects more corporate bond issuance.
At present, government bonds account for 90% of the country’s $20 billion debt market, which itself is half the size of Vietnam’s equity market in terms of market cap.
But progress has been made on this front, says Scriven. Since the start of the year, the dong has strengthened against the dollar, the bond market has performed well (the Vietnam five-year government bond yield has fallen from 12.5% to below 9%) and stocks are up around 20% year-to-date.
All this is to be expected as last year’s tight monetary policy begins to ease, he says, “and there’s probably more easing to come”.
There’s been a lot of impetus on broad reforms – “they start at the macroeconomic level, but cross into regulatory and capital markets territory”, adds Scriven. The rules on open-ended funds are just one example of this.
Another is the mooted raising of foreign ownership limits in domestic companies, which has been discussed for some months. Such a move may become part of the current raft of regulatory changes, says Scriven, as it has been formally tabled at government level.
Another part of the country’s reforms involves an effort to tackle the “thorny problems” of state-owned entities (SOEs). Roughly, SOEs take up about 60% of total new credit, deliver 30% of GDP and represent just 5% of employment, he notes. “There are vested interests there, so it’s a difficult area, but it’s one of the top three government priorities right now.”
It was announced last week that all SOEs will have to report like a public company, irrespective of their ownership structure. Privatisation of some of these firms is likely to form a part of these changes, says Scriven, who expects the government to set some serious deadlines before 2015.
“At the other end of the spectrum, we may see some smaller companies delisting,” he adds. “You could argue that this needs to happen, since 50 companies take up 80% of stock market cap, and another 650 companies occupy the rest, so some are clearly too small.”
This is already happening, and potentially it’s an interesting development for private equity investors, which could buy certain firms and then delist them, notes Scriven.