Another reminder to sign up for my latest event, at ETF Stream, on Technology funds. It is on the morning of June 12th on Cheapside in the City of London and boasts a bunch of first-rate managers from both the active and passive space. Tickets are free if you register now at

Vietnam – frontier to emerging market?

Next up is Vietnam. I’m catching up with Andy Ho, manager of the biggest closed-end fund in this space VOF later this afternoon. Inevitably I’m going to ask him what might be a positive catalyst for Vietnamese equities, especially given events in its northern neighbour China. Inevitably discussion usually turns to the thorny old question of when Vietnam will be promoted from the Frontier basket of nations (with basket being a very appropriate adjective) to the classification of the more ‘ mainstream ‘ emerging market.

Helpfully VOF has just released a note which identifies one of the key obstacles to this promotion something called Foreign Ownership Limits (FOL), which impeded investors’ abilities to buy all of the individual stocks that they want, and also presents serious operational issues for foreign fund managers. According to VOF, when a stock has reached its FOL, the only way a foreigner can buy the stock is by purchasing from another foreigner, which would typically be done at a 7-10% premium to the prevailing market price.

“The main problem this presents to the buyer is that this stock that he now owns will be “marked-to-market (MTM)” at the prevailing market price, so this investor will immediately suffer a 7-10% loss on that transaction (although he would make a gain equivalent to the prevailing FOL premium when he sells the stock). The MTM problem can only be alleviated by setting up a separate “foreign board” on which stocks bought and sold between foreigners can be marked-to-market, or by introducing “Non-Voting Depository Receipts (NVDR), which have been very successful in Thailand, for example. Another problem the FOL introduces is that many of these trades between foreign investors that are done with an FOL premium are done off exchange, which entails seeking case-bycase approval for those transactions (which typically entails paying a significant “facilitation fee” to get the paperwork processed in a timely manner). Until 2015, FOLs on all industrial companies were 49%. That year, the Vietnamese government began letting most companies (except for those in certain sensitive sectors) choose their own FOL, but to date, only a small number – just 33 of nearly 750 listed companies – have elected to raise their FOLs to 100%. Banks were and continue to be limited at 30% foreign ownership. In November 2018, the government released a draft of a new securities law that could potentially set the default FOL to 100% for most listed companies (excluding banks). This legislation was not discussed at the most recent meeting of the National Assembly, which could mean that the soonest it will be discussed is at the May 2020 National Assembly. We believe that the passage of this law is probably a prerequisite for Vietnam to be put on the watchlist for MSCI-EM index inclusion.”

Beyond FOLs, Vietnam continues to fall short in a few other key areas according to VOF:

  • “FX Liberalization: It needs to be easier for investors to take money in and out of Vietnam, and to hedge the FX risk on investments that foreigners made in Vietnam.
  • English language issues: Listed companies’ annual reports, accounts and other materials are mostly in Vietnamese. Furthermore, not all information from the stock exchange or even regulations is available in English.
  • Short Selling: Not allowed.
  • Clearing House: The Vietnam Securities Depository (VSD) needs improvement because trades currently need to be pre-funded, there are no overdraft facilities, and other technical issues.”

“Given the number of changes that have to occur and the slow pace of legal reform, we believe that Vietnam’s promotion to EM status will occur in the next two years.”

A different way of looking at crypto

London Crypto fund managers Prime Capital have a fairly original way of looking at the boom and bust in Bitcoin prices. I’ve featured two charts from one of their notes, which examines the price of Bitcoin. The first is a typical linear scale which strongly suggests a boom/bust – and maybe even hints at another bull rally around the corner….

The second chart uses a logarithmic scale, which they maintain is a much better way of looking at percentage changes and thus volatility.

“ In such [logarithmic] charts, an increase or decrease by a given distance always equates to the same percentage change in prices, rather than the same absolute change in prices. To give an example, from the [first] linear chart above we can immediately infer that a price change of $50, say, has become much more likely over time. But this is no surprise as Bitcoin prices have increased by many orders of magnitude over the last ten years. The log-chart [below]  shows that the probability of Bitcoin prices changing by 1%, say, has declined over the years as price spikes have become less pronounced and bull and bear market cycles are more drawn out. At the same time, we can see that the curve has been flattening, showing that not only volatility but also returns have declined over time”.

Clearly Prime Capital as a specialist in this niche is going to speak up their own book, and surprise, surprise they do conclude that these current trends will continue and that Bitcoin is turning into a kind of digital gold which will grow in line with real GDP. “Until then though, and assuming no negative developments, we would expect crypto prices to keep increasing as more and more investors educate themselves about cryptocurrencies and their potential use cases, and determine to what extent they would like to allocate to the asset class given their risk-return preferences.”

This all sounds very sensible but I would suggest a more useful tailwind might be the absence of momentum. My suspicion is that the vast majority of investors who piled into the boom in digital currencies have now exited. It’s been a terrible investment and although digital currencies have provided valuable diversification, its all been the wrong sort of diversification i.e negative price momentum. There’s also been a fairly detailed debate which suggests that the oft-quoted levels of market liquidity are a sham and that the numbers can’t be trusted.

The net effect of all this is to push any momentum driven speculator away from cryptos. What’s left is the real market in the currencies, and the buyers and sellers are now trying to find some sensible fundamental price. My hunch is that we may not be far from seeing Peak Crypto Bear conditions. If that is the case we could be close to bottoming out this market, though we could, of course, be easily thrown off course by yet another crypto scandal.