Greed drives bourse to the brink

Vietnam Investment Review; March 5, 2007 -- Article Excerpt. Dr Vuong Quan Hoang, a research scientist at CEB-University of Brussels and managing director of InvestVietnam,. Inc. shares his ideas on the ongoing explosion of Vietnam's stock market. The thirst for a fast profit and groundless greed of many investors have blown up the stock market bubble and together with the absence of market makers, these factors are creating implicit market risks.

In 2006, the VN-Index rose nearly 150 per cent and during January, it increased by 36 per cent. What do you think of these gigantic rises?

From a psychological aspect, there are three reasons behind the market's recent explosion. First, Vietnamese in general really want to make money fast, easily feel satisfied with what they have earned and always seek easier profits. Second, business opportunities in the economy are not so easy to find, especially when one pursues it by themselves. Third, the transaction capacity of the market has yet to be brought into full play and the main reason for this is the periodical order matching system and the bottle-neck issue on the Ho Chi Minh City's Exchange. These factors result in a deviatory supply-demand relationship, strongly affecting stock price fluctuations.

What is the stock market's real risk rate now?

The risk is large. The most important function of the market is to create high liquidity for stocks. However, in Vietnam, that liquidity remains very low. The market can reach a total value, per trading session of VNDI trillion but in comparison with the market's entire scale (nearly VND30 trillion) or with the real demand for transactions of investors, the liquidity of Vietnam's stock market is quite worrisome. In addition, given the absence of market makers, the market has a special feature. When stock prices are high, almost none sell and when they are low, there are few buyers. This places the market in a situation when most transactions are unilateral and in terms of mathematical statistics, any big jump contains risk.

Unexpected market developments have led bourse management to continuously post warnings. But, many view such warnings as unnecessary, explaining that the market has its own rules?

Though the Vietnamese economy's annual growth rate from 7.5-8.0 per cent is high compared to the world average, there is no point if stocks keep rising 30 per cent monthly. When the market was small with total capitalisation of just 1-2 per cent of GDP, it was not worrisome. Now, the market exceeds 20 per cent of GDP, the market's growth has created illusory prosperity, which goes with panic. Panic is the single feature that distinguishes the stock market from normal commodities markets. If the commodities fall in price, they can be bought though they are not really necessary. They can be given away or replace old ones. By contrast, when financial products fall in price, many are ready to dump them though they used to believe these products were good. The panic psychology is very dangerous to Vietnam's stock market because of its low liquidity and absence of market makers.

The State Bank has warned commercial banks not to pour money into the stock market, but this phenomenon has yet to be curbed. This phenomenon creates a communicating 'vessels effect' between bank deposits, the money that depositors expect to be safe with fixed income generation, and the investment channel with unpredicted risks. As an economist, I feel very concerned when the market has grown excessively regardless of the authorities' warnings.

One reason often quoted to assure investors of the recent sharp rises in stocks price is that Vietnamese businesses have been sold at a low price (almost all of the listing businesses are equitised state-owned enterprises) and at present they are being reevaluated. What do you think of the quality of Vietnamese businesses in general?

If quality is measured in scale terms, this type of quality went up strongly last year. However, if the business quality is defined by such standards as business strategy, sectoral planning, core values and strategic vision, it is very doubtful. I have met with leaders of many big businesses in Vietnam and they are all worried about businesses' future in the context of the global game (the WTO)....

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