Will recent political steps affect the progress of Vietnamese stock markets?
As an international investor, I am always looking for signs of progress in markets where our group invests. In the case of Vietnam, the Kusto Group has been active for more than a decade with a range of operations, and recently we have seen indications that the country may be reaching an important economic milestone.
Recently, the Vietnamese Prime Minister (PM) called for stronger regulation and greater discipline in Vietnam’s capital markets, and I for one believe this was a wise decision. Speaking at the Hanoi Stock Exchange, the PM called for greater rigour in stock market oversight, with improved transparency and stronger penalties for manipulation and misleading reporting.
As an investor in Vietnam, I believe that in a time of low interest rates, Vietnamese consumers need somewhere to put their money. In today’s Vietnam, there is strong economic growth, strict controls over capital outflows, and regular cash flows into the country from overseas, particularly as citizens working abroad send remittances home. In this context, the stock market—if reformed—might become an attractive option.
Investing in real estate has long been seen as an alternative to savings accounts, but only for those who can afford it. Over the past few years, the Vietnamese property market has grown from strength to strength. At Kusto, we have seen this first hand—developing Ho Chi Minh City’s major new luxury waterfront project, Diamond Island while supplying materials to the construction industry to support the nationwide real estate boom.
But when an economy becomes overly dependent on real estate investment, housing prices rise, putting them out of reach for many. A rising property market can lead to speculation and inflation, both of which may create dangerous bubbles.
The PM is right to look to the stock exchange as one solution. There is, however, more to developing thriving capital markets than simply opening a stock exchange. Many countries have failed in their efforts to develop thriving capital markets. Investors at home and abroad, are looking for exchanges that offer them higher valuations and higher returns. Stock exchanges which are effectively regulated, protecting the interest of smaller and minority investors, have higher valuations and produce higher earnings multiples. Trust is at the heart of the PM’s call for better regulation, and trust is the small investor’s priority for a stock exchange.
Today, though, investing in the Vietnam stock market is not a viable option for most Vietnamese.
Market manipulation is an issue, and companies are known to make false or misleading statements to bolster their share price. Unless there is an effective deterrent, there will always be the temptation for companies to paint a rosy picture of their earnings. In turn, this leads to an atmosphere of misinformation, where cheats and fraudsters could be making a quick profit at the expense of the integrity of the market through self-dealing, insider trading, or a host of other underhand tactics.
This leads to volatility in the market as stocks rise and fall according to the rumour cycle. A reformed and well governed stock exchange will allow Vietnamese companies to raise money from Vietnamese investors and start a virtuous cycle of capital growth. But without trust, companies would be better off seeking funds from elsewhere, and investors would be better off with savings accounts.
This is a classic chicken-and-egg situation. A country where many citizens hold shares will have a strong investment\ culture, leading to a fair and transparent stock market.
The answer, of course, is better regulation and enforcement. Vietnam needs serious penalties for companies that mislead investors, to act as a deterrent, and the legal system should show these penalties will be enforced. Shareholders should be emboldened to seek
remedies through the courts whenever companies seek to hide bad news, manipulate their results, or engage in corruption. We need strong, independent, and expert authorities to police the markets and enforce rules, exposing insider traders and other manipulators.
In exchange, companies will have new flows of capital, and will reap the benefits of transparent governance. And local investors will be able to participate and contribute. Collectively, we’ll see more Initial Public Offerings (IPOs), a more liquid market, and a level playing field. The PM’s call for stronger regulation is a welcome step towards Vietnam becoming a nation of shareholders.
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