Not every security in Vietnam is open to foreign investors, but there are enough to make for an index. Citigroup and FTSE Group teamed up to launch the country's first equity index for foreign institutional investors on May 22.

Known as the FTSE Vietnam Accessible Index, it is a response to growing demand for access to Vietnam's restricted stock market, Justin Kennedy, managing director of Citigroup Global Markets Asia, told Securities Industry News. One reason for the attraction: Vietnam's gross domestic product grew 8 percent last year, the fastest among countries in the Association of Southeast Asian Nations (Asean).

Kennedy said that "there has been huge interest" in the index, and it's coming increasingly from investors "seeking to broaden their market exposure"--just the kind of thing that can lift emerging markets into the global mainstream. The index covers the top 80 percent of the stocks listed on the Ho Chi Minh City Securities Trading Center, based on market capitalization. It is adjusted monthly, rather than on FTSE's usual quarterly schedule, because of the fast-moving nature of the Vietnamese economy.

"There is a large pipeline of IPOs, and it is important that the index is able to include these new stocks as soon as practicable," explained Kennedy. In addition, companies will become ineligible for inclusion if they have already hit their foreign investment caps.

"Stocks that have reached their foreign ownership limit are inaccessible to foreign investors," said Kennedy. "To guarantee the usability of the index [and to be included in it], a stock must have at least a 2 percent window available for foreign purchase. If that falls below 2 percent, the stock is removed from the index.

"The stock will be eligible for re-inclusion only when the window exceeds 10 percent," said Kennedy. "The index will also be subject to readjustment if the Vietnamese government changes its regulations on foreign ownership. Monthly reviews also help the index remain stable and keep transaction costs down."

Characteristics of Growth

The increased interest in Vietnam is due to several factors--a booming economy, a growing stock market and the recent accession of Vietnam into the World Trade Organization (WTO). The Asian Development Bank projects that GDP growth will remain above 8 percent in 2007 and 2008.

According to a recent Asian Development Bank report, the number of listed companies rose from 41 to 193 in 2006, with total market capitalization increasing by a factor of almost 20, to $14 billion.

The country's WTO approval came last November, with the proviso that its economy be liberalized. For example, in the financial sector, foreign banks were allowed to begin opening branches in April. Foreign brokerages will be allowed to set up wholly owned subsidiaries in five years, according to Dan Bui, a director of Viet Capital, a Hanoi-based investment and management consulting firm.

"Foreign capital plays a very important role in the market," said Bui. "The market is developing as fast as it happens in other emerging markets, but it's changeable and unpredictable because of an imperfect market-working environment."

Vietnam is seen as offering fresh investment opportunities, in contrast to the economies of more-developed Asian nations that are viewed by investors as offering less potential for high returns, said Chee Soon Lum, an economics professor at the McRae Institute of International Management at Vancouver, Canada's Capilano College.

Seeking Better Returns

"The Vietnam equity market is still virgin territory compared to its Asean neighbors," said Lum. "When the Thai market is vulnerable and the Malaysian market is boring, there is a tendency for capital flows to move to where expected returns are more promising. The Vietnamese government's market-based reforms, which started a decade ago, are paying off. There is more trust by the foreign investors and fund managers that Vietnam is serious about creating wealth and allowing market discipline to rule over socialist edicts."

The next steps for the FTSE Vietnam Accessible Index, said Kennedy, are to develop products based on the index, offer exchange-traded funds on other Asian exchanges, and structure long-term investment products for retail and high-net-worth investors.

Underscoring how interest in Vietnam has picked up, Dragon Capital Group, an investment bank with offices in Ho Chi Minh City and Hanoi, introduced a Vietnam equity index in May. Similar to the FTSE Vietnam Accessible Index, the Dragon Capital VN30 is a free-floating index with a diversified blue-chip portfolio aimed at international institutional investors.

Gene Law contributed to this article.