When Vietnam was added to FTSE Russell's secondary emerging market index on September 21st, many investors expected a wave of foreign money to flow into the country's stock market. But the reality has been different: the VN-Index, Vietnam's main stock benchmark, fell 2.2% in the first week after the reclassification, and overseas investors were net sellers.
What happened
According to data from the Ho Chi Minh Stock Exchange and the London Stock Exchange Group, foreign investors bought a net 2.7 trillion dong (about $110 million) of shares on the Ho Chi Minh exchange in the week before the reclassification. In the first week after, they flipped to net selling 2.8 trillion dong (roughly $115 million).
This pattern suggests that some investors had already positioned themselves ahead of the index change, buying in anticipation of passive funds that track FTSE indices having to add Vietnamese shares to their portfolios. Once the event passed, those same investors took profits or reduced their exposure.
Why the upgrade mattered
FTSE Russell is one of the world's leading index providers. Its classifications are used by fund managers globally to decide where to allocate capital. Being added to a secondary emerging market index is a step up from Vietnam's previous status as a frontier market. It signals that the country's stock market has met certain criteria for size, liquidity, and accessibility.
However, the upgrade to a secondary emerging market index is not the same as being included in the main emerging market index, which would force much larger passive inflows. The secondary status is often seen as a stepping stone, and the actual investment impact can be modest.
Vietnam's market has been growing rapidly, with a young population and a manufacturing boom. But it still has restrictions on foreign ownership in some sectors and other structural issues that can deter international investors. These factors may explain why the upgrade didn't immediately translate into sustained buying.
What it means for investors
For everyday investors, the lesson is that index upgrades are not always a guaranteed catalyst for rising prices. While they can bring attention and some inflows, the actual effect depends on broader market conditions and investor sentiment.
In this case, the selling pressure came despite the positive news. This could be due to profit-taking after a run-up, or concerns about global economic conditions. It's also worth noting that foreign investors are not the only players in the market; domestic investors often have a bigger influence on day-to-day moves.
For those holding Vietnamese stocks or funds, the key takeaway is to focus on the long-term fundamentals rather than short-term index-related flows. The country's economic growth story remains intact, but market volatility is normal.
Investors in other emerging markets have seen similar patterns. For example, when a country is added to an index, there is often a 'buy the rumor, sell the news' effect. This is a common phenomenon in financial markets, as seen in other recent events like Korea's KOSPI hitting a two-month high despite foreign selling or Indian stocks edging up even as foreign selling persists.
Looking ahead
The next big milestone for Vietnam would be an upgrade to FTSE's main emerging market index, which could come in future reviews. That would likely trigger larger passive inflows. But for now, the market is adjusting to the reality that the secondary upgrade alone isn't enough to change the foreign investment picture.
Investors will be watching whether the selling continues or stabilizes in the coming weeks. They'll also keep an eye on any policy changes that could make Vietnam more attractive to foreign capital, such as easing ownership limits or improving market infrastructure.
In the meantime, the VN-Index's decline is a reminder that index changes are just one factor among many. For those with a long-term view, the fundamentals of the Vietnamese economy—strong growth, a young workforce, and increasing integration into global supply chains—remain the more important story.
