VNX Allshare: Is new index a boon for Vietnam's stock market?

By Ha Phuong   October 24, 2016 | 02:00 am GMT+7
VNX Allshare: Is new index a boon for Vietnam's stock market?
A investor looks at stock market screens at a securities company in Hanoi, Vietnam, April 20, 2016. Photo by Reuters/Kham

The launch of the new benchmark index on Monday feels like the start of a merger between the country's two main exchanges.

The new combined VNX Allshare aims to restructure Vietnam's stock exchanges as it seeks to upgrade the country’s stocks status from “frontier" to “emerging”.

With the mission of reflecting the price movements of all stocks on the market, the index is expected to prime the pump to get more offerings and trading going in Vietnam and draw mutual guidelines and regulations to match competition from other Southeast Asian bourses.

By launching the index, the government intends to attract more overseas investors. In the first half of this year, foreign traders poured $722 million into Vietnamese stocks, three times higher than the same period in 2015.

“The birth of the VNX Allshare is a milestone for Vietnam’s security market,” said Vu Bang, chairman of the State Securities Commission.

The VNX Allshare, the country's third bourse after the VN-Index in Ho Chi Minh Stock Exchange and the HNX-Index in Hanoi, will officially launch on October 24 with 451 listed stocks, representing 90 percent of the combined market capitalization.

One step closer to international practices

Two stock exchanges are currently trading in Vietnam at the moment -- the Ho Chi Minh Stock Exchange (HoSE) and the Hanoi Stock Exchange (HNX).

While the HoSE is considered a trading platform for relatively large corporations, the HNX appears to be a better place for small and medium sized firms. Considering the trading value, the HNX seems to be the underdog, accounting for just 16 percent of the total. In the first half of this year, some large-cap companies listed on the HNX switched to the HoSE, whose benchmark VN-Index rose by nearly 20 percent during the first six months and was one of the best performers in Southeast Asia.

“Investors tend to follow trends they see on HoSE and take the HNX influence for granted,” Hung Do, a broker at FPT Securities, told VnExpress International. It seems the two exchanges with two major indices trading at the same time is somehow holding back investors. “The Vietnamese market is in need of a more attractive joint index rather than two operating in isolation,” Hung added.

Following the global trend, exchanges worldwide are feeling the urge to merge. Here’s why: If you are a broker with two sets of connectivity and two sets of relationships with two separate exchanges and cross trading is not allowed, removing one set will make your life cheaper and easier.

Recently, the London Stock Exchange and Germany’s Deutsche Borse announced their merger, which would, if successful, create Europe’s biggest exchange. In 2013, two Japanese bourses merged to form the world’s third biggest exchange. Vietnam is not an exception. Sooner or later, with the aim of becoming a part of the MSCI, market capitalization and liquidity both have to be upgraded, so a merger is inevitable.

Last year, the government announced that it would restructure and merge the two existing bourses. Since then, no specific plans have been revealed; the intention of launching the VNX Allshare may or may not be related to such a merger. However, whether or not the launch of the VNX Allshare is a premise, kindling the merger of two existing exchanges remains to be seen. The Vietnamese market needs to be of a certain size and offer unique service in order not to be left behind by global development, said Nguyen Thi Thuy Linh, director at the research department at VP Bank Securities. The merger will follow the government’s divestment plans from state-owned institutions.

90 percent of the market

The VNX Allshare will cover nearly 90 percent of the combined market capitalization, and stocks will need to meet three screening qualifications.

Firstly, the stocks must have been listed for at least six months without violating market rules. Secondly, they must have a return ratio of shares of at least 0.02 percent to ensure the company is qualified for trading. And thirdly, the minimum free-float rate must be no less than five percent.

In comparison to the VN-Index, the free-float rate and minimum return ratio have been set at lower levels. “Choosing a mutual screening criteria for the VNX Allshare is the most difficult task because the business structures of listed companies on the two exchanges are different from each other,” said Nguyen Thi Viet Ha, director of research and development at the HoSE. At this early stage, the screening criteria will start with lower standards so that more stocks on the two bourses can meet the liquidity and investment requirements. But in the near future, the screening criteria will be elevated to meet international standards, Ha added.

What can investors expect?

The launch of the VNX Allshare could have stamped out its predecessors if it had not been for its starting value. “It has been a decade since the last time a newly launched index had a base value of 1,000,” said an official from the State Securities Commission.

According to international practices, base values are usually set at 100, 1,000 or 5,000. Most indices on Vietnamese stock exchanges start from 100 points at the moment.

Speaking of this revolution, Ha said that compared to the lower base value, starting at 1,000 points allows investors to have a better insight into the smallest fluctuations on the market.

With this concrete start, the VNX Allshare appears to be a reliable underlying asset for derivatives and financial products. Analysts have put their faith in its capability of being a solid fundamental to facilitate the development of the upcoming derivatives market, which will officially open in the first quarter of 2017, as well as exchange-traded funds.

However, from an investor's point of view, the first two available derivatives products - stock index futures and government bond futures - are “too safe” and not appealing enough, so they doubt whether the VNX Allshare can replace VN-Index to become an outstanding lying asset.

Hung Do, a broker at FPT Securities, also expressed his concerns about year-end trading, when investors tend to focus on certain shares to earn money so it is unlikely this new index will attract them. Travel back in time seven years when the VN30 was first launched, it was expected to make the market boom with the 30 largest shares by market liquidity. However, time and time again investors are returning to the “too outstanding” VN-Index. At this early point, the VNX Allshare is probably more suitable for corporate investors rather than individuals, and it will have to overcome the big shadow cast by the VN-Index.

With its debut in late October this year, the VNX Allshare may not have an immediate or direct effect on the securities market, but it should impact the derivatives market. How it bolsters or drags on the market will be revealed no later than the first quarter of 2017 the when derivatives market officially opens.

Related news:

> Vietnam to launch combined stock index this month

> Vietnam's stock market outperforms ASEAN rivals

> Vietnam to launch derivatives market in 2017