March 20, 2007 –
“It’s the Wild West,” says Noritaka Akamatsu, the World Bank’s lead financial economist in Hanoi. This Is her description of the Vietnamese stock markets today In 2007. Perhaps we should say it is the “Wild Wild East”, the modern version of yesteryear’s Wild Wild West. Currently, there are an estimated 150 listed stocks publicly traded in Vietnam on the Ho Chi Minh Securities Exchange with hundreds more unlisted stocks that trade through internet chat rooms and back alleyways. This is up from only 30 listed stocks in 2006, with a government target of listing over 1,000 stocks by 2010. Furthermore, the total market capitalization of ALL the legitimately listed stocks is tiny, at about $14 billion. To give you an Idea of how small the Ho Chi Minh Securities Exchange is, the total market capitalization of one company, General Electric, is more than 25 times the size of the entire Vietnamese stock market. Of course, nobody knows what the total market cap of unlisted stocks that trade on Vietnam’s grey market truly is…which brings me to my next point.
Although I have made the comment that strong, individual stocks are better than a strong mutual fund 100,000 times out of 100,000 times, and I still think this is true, in the case of someone wanting to invest in Vietnam’s stock market today, because their markets are highly unregulated and risky, this is the one case I would advocate investing in a mutual fund over individual stocks. Why? Due to the unregulated and early stages of this stock market, and believe me, it is In the embryonic stage right now, it is virtually impossible to identify strong individual companies unless you live in Vietnam and personally know company executives.
When I mentioned that there are thousands of unlisted shares exchanging hands In back alleys, cafés and in cyberspace chat rooms, this was not just a flowery analogy, but the actual reality in Vietnam. In fact, thousands of listed shares of companies trade hands this way as well. These actions are comparable to the following game. They post on ebay, “I have 10,000 shares of GE on sale for $40”. They then enter the most popular stock chat rooms online masquerading as a company executive and state “Right now I have multiple inquiries from multinational companies that want to purchase my company. This should drive our stock price up to $60 or higher in less than a month.” They then return to ebay to watch the feeding frenzy then ensues as people believe this fake information before they finally exit the trade and sell the shares to the highest bidder. In the United States, such actions would not only be rewarded with a fine that forced you to return any profits plus punitive damages but also most likely, some jail time. However, in Vietnam, not only are such shenanigans entirely legal right now but they are being employed by thousands of people. If you are a talented con man, hop the next flight to Ho Chi Minh City because riches await you if you learn this con game in the stock market. Obviously at a total market cap of o tiny $14 billion, there are not enough stocks to feed demand, a very illiquid market exists, and such shenanigans will continue for quite some time until the market catches up to demand AND the State Securities Commission greatly expands its employee base.
Vietnam’s securities regulatory body is called the State Securities Commission. As of early 2007, Vu Bang, the commission chairman, currently employed only 10 officers whose responsibility it is to monitor the activities of about 200 companies listed on Vietnam’s two bourses as well as thousands of unlisted companies. He self-admittedly acknowledges that there is no possible way that he can enforce their rules with a staff of 10. Furthermore, Bang states, “In 2007, we can’t expect too much…We are considering how legal or illegal those websites are…In time, we’ll consider it more.” Bang speaks of internet chat rooms where deals to trade stocks are struck and where savvy investors chat up a stock with false information to drive the price higher. In the U.S., this type of behavior would land you a nice jail sentence, but in Vietnam, as of today, anything goes!
Like Akamatsu said, it truly is the “Wild Wild West” where reliable market information is virtually non-existent and people trade stocks based upon rumors alone, hoping that stocks that are trending higher will continue to do so. Although I can’t confirm the following, I read an article that stated that the Ho Chi Minh Securities Exchange suspends trading in a stock when its price rises or falls by 5% in a day. In a market as volatile as Vietnam’s, I’m not really sure how enforceable that policy is as I imagine that every day, a significant portion of the stocks that trade on the Ho Chi Minh Securities Exchange would fall into that category.
So if you have recently been approached by your financial consultant to buy into Vietnam because it is currently one of the fastest growing emerging markets, I am going to take a stab In the dark and guess that your financial consultant disclosed the fact that the Vietnamese markets grew by over 144% in 2006 and has already grown an additional 50% to 70% this year. I’m also going to guess that he or she disclosed zero of the above risks to you including the volatile, illiquid, and almost entirely unregulated nature of their markets, and the crazy back alleyway, ebay style auctions that occur even for listed stocks everyday, and the fact that stock research, according to Mike Temple, a director at securities-trading company Dragon Capital in Ho Chi Minh City, is based upon the following scientific methods: ” My grandfather’s uncle’s cousin’s wife works at this company and says it’s a good buy.”
Make no mistake about it, Vietnam’s markets will continue to boom. Especially since they recently signed a Free Trade Agreement with the U.S., foreigners are allowed to hold 49% of publicly traded companies, and state-owned entities are being encouraged to go public. In fact, you would probably do alright just to ride the frenzy higher for the remainder of 2007 as there are not nearly enough stocks to meet demand. But just be aware that there are thousands of Vietnamese that see the stock market as many poor Americans viewed the Gold Rush in the 1800’s – an opportunity to get rich quick. For those Vietnamese that typically earn less than $300 for an entire year, the chance to make that in less than a week or sometimes in just a few days with borrowed capital Is almost too tempting to turn down despite the Vegas like atmosphere surrounding the Vietnamese markets. Many are simply betting that the ride at the crap shoot table will continue to produce 7s and 11s.
However, many companies’ stock prices are being driven higher everyday by tons of people “that have uncles that have brothers whose sister has a daughter that has a nephew that works at that company and says it’s a good buy” when in reality, the companies’ real earnings hardly justify such lofty prices. But in Vietnam today, earnings hardly matter. Sound familiar? It should. Because this is exactly the irrational buying that caused the frothiness of the dot.com frenzy that occurred in the United States. And we all know how that ended up. Valuations of companies in Vietnam are all out of whack because of this feeding frenzy.
Interestingly enough, though, because nobody really knows how much many of the traded companies are really worth, these out of whack valuations can possibly continue forward with sustained momentum for quite some time until much stricter regulations and much better transparency develops. It’s a dangerous game, and one in which everyone is trading blind. But as I’ve also stated before, irrational behavior can continue for a long time, and the Vietnamese markets just may be one of these instances. Furthermore, given that Vietnam is still in the Wild Wild West phase of its stock market, any real reform that leads to a decent level of transparency will most likely take years.
Am I in the Vietnamese stock market? Yes, but only with one company, in a very small speculative position (and if you are a maalamalama member, you know what stock that is). I emphasize the very small position. There are two types of volatility when it comes to investing, good and bad volatility. Good volatility is volatility that is fairly predictable in arenas with a fair amount of transparency and good volatility can be used to build great wealth. Bad volatility is what Vietnam’s stock market Is chock full of right now. Bad volatility is volatility produced by pure speculation where buyers and sellers are both conducting trades blindly without the benefit of good Information. For this reason, If you absolutely must trade in Vietnam, temper the effects of this bad volatility by purchasing mutual funds until a modicum of transparency develops that allows you to invest intelligently in individual stocks.
Here are some of the mutual funds I was quickly able to track down for you.The aforementioned Dragon Capital runs the Vietnam Enterprise Investments and Vietnam Growth funds, VinaCapital, based in Ho Chi Minh City, runs the Vietnamese Opportunity Fund, and PXP Vietnamese Asset Management runs the PXP Vietnam and the Vietnam Emerging Equity Funds. And again, welcome to the Wild Wild East.
[tags]Vietnam, Ho Chi Minh Securities Exchange, PXP Vietnamese Asset Management,Vietnamese Opportunity Fund[/tags]
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
