High Probability of FTSE Upgrading Vietnam’s Market Status
There are currently two major and reputable financial organizations in the world that are responsible for market classification: MSCI (USA) and FTSE Russell (UK). The basic market categories include frontier, emerging, and developed markets. As of now, Vietnam is still classified as a frontier market by both MSCI and FTSE.
According to Mr. Nguyen Quoc Nhat Trung, Head of Research and Analysis at Vietcap, MSCI has provided specific criteria for Vietnam to improve upon. These include the maximum foreign ownership ratio (FOL) and the low foreign room ratio, which impact foreign investment capabilities.
Additionally, there is a need for equal rights for foreign investors regarding information disclosure in English, which is currently not detailed enough. MSCI also desires for Vietnam to implement a central counterparty clearing (CCP) mechanism.
It may take Vietnam a few more years to fully meet all of MSCI’s criteria. In the meantime, the country is making strides towards improvement.
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Turning to FTSE, Vietnam has been on their watchlist for a potential upgrade to emerging market status since September 2018. Therefore, in this upgrade cycle, experts are focusing more on the FTSE story as it is a more feasible and executable scenario.
Out of the specific criteria for consideration, Vietnam has already met 7 out of 9. The remaining two criteria that need to be achieved are “Rarely fails trades” (requiring the removal of pre-trade margin requirements for foreign investors) and “DvP settlement cycle” (requiring a central clearing mechanism CCP).
To meet the upgrade criteria, regulatory authorities have implemented multiple solutions to address these issues. Circular 68 has been issued to facilitate non-prefunded trading for foreign investors, effective November 2024. The new KRX system has been officially operational since early May 2025, and its stable operation paves the way for developing new features such as CCP and T0 trading.
The Ministry of Finance and the State Securities Commission have simplified the procedures for opening accounts in Vietnamese dong and established a 33-member market development advisory group to address foreign investors’ concerns.
Moving forward, the authorities will continue to implement solutions related to amending foreign ownership limits and introducing the CCP mechanism.
Quoting the leadership of the State Securities Commission, Vietcap’s expert highlighted that since the KRX system has been operational and the Non-Prefunding mechanism implemented, the market has recorded more than 90,000 Non-Prefunding trades with a total value of over VND 20,000 billion. This is approximately three times the number of trades and double the value compared to the previous period. Non-Prefunding transactions currently account for about 50% of foreign investment value. Additionally, the failure handling mechanism has proven effective, with only 4 failed transactions out of hundreds of thousands of Non-Prefunding trades, all of which were safely resolved. These developments indicate a high probability of Vietnam being upgraded by FTSE.
Regarding the “DvP settlement cycle” criterion, allowing foreign investors to trade early without requiring a margin can temporarily fulfill this criterion. In the long run, developing a CCP mechanism will thoroughly satisfy this criterion.
Based on these improvements, FTSE will announce the upgrade results in their annual market classification report at the end of September or early October this year. Experts anticipate that Vietnam will be upgraded in this cycle or, at the latest, in the semi-annual review in March next year. The base case scenario is an upgrade in the September cycle.
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ETF Capital Awaits Upgrade Confirmation Before Allocating to Vietnam
One of the expectations from market upgrades is the attraction of additional foreign capital. Responding to the question of when foreign capital will enter the market, Mr. Nguyen Quoc Nhat Trung shared that typically, after an upgrade announcement, markets need about six months to be included in the index. To avoid liquidity issues, this process is usually divided into two phases.
If Vietnam is upgraded by FTSE in September 2025, it will officially be added to the index with a 50% weight in March 2026, and the remaining 50% will be included in subsequent periods.
There are approximately 21 passive investment ETFs tracking the FTSE Emerging Markets Index, with total assets of nearly $320 billion. Based on Vietnam’s current market capitalization, the country can potentially attract nearly $1 billion from these passive funds.
Active fund capital can be up to five times that of passive funds, bringing the total foreign capital inflow from the upgrade to $5-6 billion.
Explaining the reason for the current lack of foreign capital inflows, Mr. Trung stated that it is entirely normal not to see significant foreign investment through ETFs or active funds at this stage. Passive funds (ETFs) operate based on the principle of investing only when a market is officially upgraded and included in the index with a specific weight. The expected inflows will come from entirely new ETFs rather than existing domestic ones.
Active funds have more flexibility but mostly tend to wait for official upgrade news from FTSE. They also consider global macroeconomic factors such as US interest rates, exchange rates, and geopolitical risks before making allocation decisions.
Once the market is upgraded, beneficiary stocks will likely be large-cap, liquid stocks with high free-float or foreign room ratios, as these are attractive to passive ETF funds. This includes banks, securities companies with medium capitalization and high room ratios, and consumer stocks with high free-float ratios.
However, investors also consider the opposite scenario: what if the market is not upgraded? According to Mr. Vu Minh Duc, Deputy Director of Research and Analysis at Vietcap, the stock market is an expectation-driven market, and investors tend to speculate ahead of events. Even if FTSE announces an upgrade as expected, the market may still experience profit-taking and a downward adjustment, a phenomenon known as “sell on the good news.”
If FTSE does not include Vietnam in the upgrade list and postpones it until March of the following year, the market adjustment will likely be more significant due to increased disappointment.
Nevertheless, an upgrade is only a matter of time. Eventually, Vietnam will be upgraded, so even if the market experiences a short-term downturn, it will create a new speculative trend for the next upgrade cycle in 3-6 months. Overall, while short-term fluctuations may occur during the upgrade period, they will not affect the general and long-term growth trend of the market.
– 15:00 28/08/2025
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