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The State of the Vietnamese Stock Market

The hottest story off the presses in the global economy focuses on a country that until recently has had a market capitalization smaller than that of Krispy Kreme doughnuts. Vietnam has since then emerged from its cocoon, and its markets are on fire. In the last year, its stock market…

The hottest story off the presses in the global economy focuses on a country that until recently has had a market capitalization smaller than that of Krispy Kreme doughnuts.  Vietnam has since then emerged from its cocoon, and its markets are on fire.  In the last year, its stock market index surged 145 percent.  In just the first two months of this year, the index was already up an additional 44 percent.  Additionally, Vietnam’s market capitalization has grown from less than $1 billion to over $15 billion today.1   Although comparatively small, even by emerging-market standards, it has not discouraged waves of investors to pour money in. As Vietnam’s middle class is growing, students, civil servants and state enterprise managers with cash to spare are all rushing to buy shares, hoping to catch a whiff of the enormous amount of profits to be made.  The Vietnamese have turned away from traditional investments such as real estate and gold to invest in the stock market.  To respond to the demand, brokerage firms increased from 16 to 56 in one year.2

The recent upsurge of the exchange, with 107 listed companies, has been partially propelled by foreign investors, eager for exposure to one of Asia’s fastest-growing economies.3 Vietnam’s long-term capital appeal is obvious.  The economy is expanding around 8 percent annually4; it recently joined the World Trade Organization; the government is rapidly privatizing industry; direct foreign investment is taking off, and half of the population is younger than 355.

Classic Bubble Trouble Concerns

However, Vietnam’s stock market is showing signs of a classic bubble trouble.  Share price valuations are approaching those of Internet stocks in the 1990s, and according to Credit Suisse, foreign purchases of Vietnamese stocks in January exceeded those made in Taiwan, whose market size is about 15 times the size.6 According to Jonathan Pincus, the UN’s chief economist in Hanoi, “All the chatter in Hanoi is about people investing in the market. I don’t know if anyone knows what these companies are worth, but they are buying the paper.”7 Amidst the frenzy, there are concerns that the bubble could collapse at any point, having huge repercussions on Vietnamese and foreign investors alike.  This frenzied investor interest has created some market distortions.  The most popular stocks are now trailing at more than 50 times their trailing 12-month earnings.8 Additionally, because the government is concerned that the stock market prices are increasing continuously and that they are grossly overvalued, they could impose capital controls at any time to curtail potential capital flight in the event of a market crash.  This could lead to large fluctuations in prices that could endanger the savings of many citizens rather than lead them to riches and wealth.

A Call for Action

In response, rules on bank lending for stock market purchases have tightened, and officials are also considering a rule for foreign investors to keep their capital within Vietnam for at least one year to prevent capital flight. Although many refer to Vietnam as the “emerging China,” investing in Vietnam now could be tricky.  When the speculation ends, prices could fall hard.  Gradually, the government should introduce more restrictions to regulate the market and ensure that accurate information about the market is made available to the public.  At that point, entering the Vietnamese market would be a solid investment.

Source: www.asiaecon.org |



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