Maybe Some Vindication For The Vietnam ETF

Emerging markets are hot this year, but their frontier counterparts are badly trailing. For example, a widely followed benchmark of frontier markets is up just 1 percent year-to-date. The Market Vectors Vietnam ETF. VNM is barely better with a gain of 1.1 percent.

Tailwinds Forthcoming?

There are some fundamental catalysts that could drive Vietnamese stocks and VNM higher in the latter stages of 2016 and beyond. Although five-year plans coming from emerging markets usually only garner attention if said plan arrives courtesy of China, investors mulling VNM should look at the details of Hanoi's most recently unveiled five-year plan. One of the most important details being targeted GDP growth of 6.5 percent to 7 percent through 2020.

Vietnamese policymakers are also targeting significant growth of the country's industry and services sectors, which could be a boon for VNM going forward. Additionally, there is positive news for Vietnamese banks, an important consideration regarding VNM because the lone Vietnam ETF allocates 45.4 percent of its weight to financial services stocks, more than triple ETF's second-largest sector weight.

Related Link: Visiting The Vietnam ETF

“Vietnam's strong economic performance is helping to attract much-needed foreign capital into its banking system, says Fitch Ratings. Banks are likely to need additional capital as they respond to the phasing-in of Basel II capital adequacy standards by end-2018 while trying to meet demand for rapid credit growth,” said Fitch Ratings in a recent note.

Vietnam desperately wants to be considered for a promotion to emerging markets status by index provider MSCI, something that is not imminently in the cards for the Southeast Asian nation. Vietnam has to some work to do on the transparency and foreign ownership limit fronts before it is a credible candidate for the frontier-to-emerging promotion. To its credit, Vietnam is taking steps in the right direction.

For VNM and Vietnamese equity indices, it is pivotal that Hanoi takes steps to motivate foreign investors to embrace shares of the country's banks.

“A sustained rise in foreign appetite for Vietnam's bank equity would be a positive development because the banking sector has significant recapitalisation needs. However, there is a limit to how much capital can be raised from overseas. Foreign ownership of any Vietnamese bank is capped at 30 percent — and, within that, foreign strategic investors are collectively allowed to own only 20 percent. Vietnam's banks may still need to raise significant capital in the still-developing domestic market unless foreign-ownership restrictions are relaxed,” added Fitch.

Full ratings data available on Benzinga Pro.