Strategy: Know the flows — Putting foreign net selling in context

Know the flows — An analysis of FINI net selling (final)

Know the flows

Foreign net selling in context. FINIs have been persistent net sellers of Vietnam recently, leaving domestic investors to wonder if this will ever stop. Risk aversion (i.e., selling what are perceived as risky assets) during the coronavirus period is not surprising, but the trend of FINI net selling has been almost continuous every month since August 2019 – long before we all became experts on COVID-19. What gives?

2H19 and 1Q20 should be considered separately when thinking about FINI outflows. We think the 2H19 outflows were driven primarily by a broad investor exit from frontier markets. Net foreign selling has clearly gained momentum due to the coronavirus this year. But this is occurring across the region, and foreign selling in other markets has been even more substantial than it has been in Vietnam.

We believe the c.US$135m in foreign net selling in 2H19 was driven largely by redemptions. Fund managers have been known to exhibit a certain amount of Vietnam market fatigue, but overall they do not tend to be outright bearish on the long-term story (or more accurately, nonbelievers simply don’t invest here). But investor redemptions leave funds with no choice but to sell what they own.

Frontier market pain. Aggregate AUMs of frontier market funds declined by roughly 40% in 2018-19 to around US$13bn, of which around US$8bn is in passive index funds. This matters for Vietnam given its 15% weighting in the MSCI Frontier E/M Index. We think this sharp drop in AUMs represents a structural rejection of the frontier markets asset class due to poor returns and limited diversification benefits.

COVID-19 shifted foreign net selling into high gear, and it has reached c. US$460m YTD. But net foreign selling of Vietnam’s stock markets has been smaller than it has been in countries across the region. Whether this represents capitulation remains to be seen, but at some point stock valuations (which are now broadly attractive) and a potential start to the economic recovery (assuming COVID is controlled by end-2Q20) should reverse this trend.

Foreigners will not keep selling forever, in our opinion. We recommend that investors on quality companies that are trading at attractive valuations and are positioned both to weather the crisis and to emerge from it in an even stronger position. For specifics, please see the Vietnam section of our recent regional strategy report on our recommendations for navigating the crisis (available here).