Restrictions on how exchange traded funds can invest are creating distortions in Vietnam’s stock markets, according to sources in the country. Vietnam’s two stock markets, based in Hanoi and Ho Chi Minh City, have been increasingly volatile in recent months as a run of bad news, including the devaluation of the currency, the default-induced restructuring of a big state-owned company and rising inflation have all spooked short-term investors.
Before that recent run of bad news, foreign investors had been buying into Vietnam’s markets in huge volumes thanks to the broadened access provided by new investment vehicles. Fund managers and investors in Vietnam, however, are concerned that investment limitations affecting these funds are driving up valuations of the companies they track to unrealistic levels while exposing investors to a potentially dangerous crash.
Access to Vietnam’s stock markets is controlled, with set quotas for foreign ownership of each stock. With these allocations almost full, the two overseas-listed exchange traded funds that track Vietnam offer foreign investors an easy way to bet on the country’s growth. But because these ETFs are themselves restricted in which stocks they can buy, the year-long surge of interest in them is having a distorting effect on those very stocks.