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Stock Market development model Essay

The goal of this project is to critique the current scenario in Vietnam and propose alternative development plans which will place more emphasis on overall economic development. This project will establish the relationship between Politics, Regulation and Reformatory measures and the Stock market; as an indicator of the performance of the country. The project will be organized as follows with the initial sections justifying the reason behind choosing Vietnam and the destination statement for the research.

The project will then summarize past trends and present scenario and build a hypothetical future. The next section will showcase two countries in case study format to demonstrate the development plan adopted. The last section will develop a development plan which will result in a systematic and ideal future scenario. Introduction (Aims & Objectives) This research project aims at studying the relationship between the economy and the stock market in Vietnam. Aspects of the economy such as Politics, Regulatory and Reforms and their role in the Stock market will be analyzed.

The main objective of this research proposal is to develop a model development plan and establish the resulting stock market movement as the indicative measure. The stock market is the window which showcases Vietnam to

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the world business community and multiple decisions are taken based on the strength of this market. Hence the chain of events can be described as analyzing the drivers behind the stock market in order to develop a strong future based on practical measures.

The foundation of this proposal comes from a comment in a letter written by the Prime Minister of Vietnam (Vietnam Economic Times, August 2002) which reads as follows “Our economy grows mainly thanks to soft loans and state subsides …. If we do not accelerate economic restructuring and raise competitiveness, we are in danger of having zero economic growth” Insight into the Topic Like many developing countries, Vietnam has undertaken several reformatory measures, which have been characterized by both internal and external imbalances.

These measures are also seen to be inundated with problems such as lack of governing structure, unemployment, poor quality of education and health and poverty. It is hard to believe a country which was destroyed by the bombing of the American Fighter jets and having thousands of episodes of the sufferings of the War Victims could turn the table in less than three decades and become the second-best performing Stock Market next only to Zimbabwe in the year 2006. Sheridan Prasso(Vietnam’s Stock Market is Booming CNNMoney.

com) reports that the main factors responsible for the boom in Vietnam stock exchange is the rapidly growing economy with a growth rate of 8. 5 percent in the year 2005 and the economic reforms undertaken by the country allowing foreigners to hold 49 percent of the share capital in the companies. However experts have attributed the growth rate to the Asian Economy Boon and the foreign aid which forms a major chunk of the economy or in other words Vietnam is an aid success story. Country Information

The country Vietnam as such is still in a developing stage with shabby roads and narrow bridges that make the transport systems unworkable like India and the mounting losses from state owned enterprises like in China. Vietnam is rated as the second most corrupted country in Asia next to Indonesia. The country is lacking a world class university despite the literacy rate of more than 89 percent. In spite of all these economic backwardness, the economy of the country has posted a growth rate of 8. 4 percent for the year 2005 and the same growth rate was expected to be maintained for the next year also.

With all the forces pulling the country backwards, the stock market was able to show a magnificent performance. So the country is maintaining the pace of its economic reforms and that will help the stock market boom also to continue, if the reforms are the only reason for the stock market boom. Till the year 2005, the stock market in Vietnam was progressing at a very fast pace. Even the early part of 2006 witnessed quite a good amount of trading volumes which slightly tapered down towards the mid of the year 2006.

But the overall performance of the Bourse is astonishingly maintained, removing everybody’s doubt that whether it was a bubble. With this background, this study presents the proposal to evaluate the functioning of the Vietnamese Stock Market since the year 2006. Vietnam Stock Market It is hard to believe a country which was destroyed by the bombing of the American Fighter jets and having thousands of episodes of the sufferings of the War Victims could turn the table in less than three decades and become the second-best performing Stock Market next only to Zimbabwe in the year 2006.

But the Vietnam’s Stock Market has achieved the fete of increasing the market capitalization ten times with 35 listed companies with it accounting for $ 1. 5 billion. The figure according to Sheridan Prasso (2006) two years before was a meager $144 million with 22 companies listed. The Stock Index had reached an all time high of almost 60 percent on December 30, 2005. All these have been achieved by a Stock Exchange that is in its infant stage, having started trading quite recently, in the mid of the year 2000.

There was every expectation that the market cap for the exchange would be more than doubled by the end of the year 2005. There were quite some reasons associated with the booming of the Vietnamese Stock Market, the prominent of which is the Country’s policy of allowing the foreign companies and individuals to hold up to 49 percent of the public companies in Vietnam. This has more than helped the Stock Market to go into greater heights. With this background this paper envisages making a detailed analysis of the evolution and growth of the Stock Exchange in Vietnam.

While discussing the factors that contributed to this spectacular performance of the Stock Exchange the paper also highlights the potential for further growth of the Stock Exchange in the future. Evolution of Stock Exchange in Vietnam Vietnam one of the ten ASEAN member countries had started its first trading center for securities in the City of Ho Chi Minh on the July 20th 2000. With Vietnam there were seven countries of the ASEAN organization that have set up stock exchanges in the respective countries.

Controlled by the State Securities Commission the purpose of instituting the stock exchange by the Vietnamese government was for the mobilization of adequate capital for the development of the Vietnamese Economy. As a beginning for securities trading, four joint stock companies were listed in the securities trading center and also granted licenses for six other companies that applied for trading in securities and also made the Bank of Investment and Development of Vietnam a state owned commercial bank as the institution for the settlement of the trading transactions.

“Government bonds and bank bonds worth about 300 billion Vietnamese dong (VND) (21. 4 million U. S. dollars) are ready for the first auction session and the amount will be increased to at least 2,000 billion VND (143 million U. S. dollars) by the end of the year 2000. ” (People’s Daily 2000) At the time of starting the Stock Exchange, the government made regulations for the foreign organizations to hold a share capital of up to 20 percent of a public company listed in the stock exchange. This was later revised to 49 percent.

Similarly regulations were made for a ceiling in the share holding of up to 3 percent in a Vietnamese company for the foreign individuals. Reasons for the Stock Exchange Boom in Vietnam Till now there is no stock market analyst is able to exactly pin point the reasons for the upward swings in the stock markets, while they can vouch and account for hundreds of reasons for a crash or a down fall in the share market trading. Similarly the Vietnam’s Stock Exchange also had made a faster growth in the 5 year period from 2000 till 2005.

Although there are no precise reasons for such a faster development, the following are some of the factors that accelerated the growth of the Stock Exchange in Vietnam. • The rapid growth in the country’s economy witnessed by a figure of 8. 4 percent for the year 2005 also had helped the sudden spurt in the stock trading and the consequent boom in the Stock Exchange operations. • Economic Reforms like every other developing country, undertaken by the Vietnamese government also had helped the transnational and multinational corporations to eye Vietnam as an investment destination.

These corporations were lured by the open policy of the Vietnamese government in allowing the foreigners to invest in the capital of the Vietnamese Public companies to the extent of 49 percent. This allowance to have the investment up to 49 percent proved as a great impetus for the increased Foreign Direct Investment (FDI) inflow in to the country. • The economic reforms adopted by the Vietnamese government gave a freedom to all the state owned enterprises to go into public.

Once the state owned enterprises became public companies, their shares were being traded in the Stock Exchange and this has multiplied the trading operations in the Exchange. Vietnam’s Stock Exchange – Functioning Since the year 2006 “Democracy and capitalism are supposed to be the big victors of the post-Cold War period, but the hottest markets are neither democratic nor really capitalistic. China is soaring, of course. But so is the nation that kicked out U. S.

troops 35 years ago so it could enjoy its own miserable system of misgovernment – Vietnam. ” (Bill Bonner 2007) According to a report in Financial Times, the scenario in today’s Vietnam with respect to the stock exchange transactions is that with the clutches of Stock Market Mania as the best way of making fast and easy money, deeply engulfed, all strata of people including the students, civil servants and the managers and executives of the state owned enterprises who have enough cash to spare are madly running after the stock trading.

They are all under the wild dreams of winning windfall profits in the securities trading which has made the formal stock market’s main index to more than 249 percent, an astounding figure within a short period of less than 13 months. The reason for such a mad rush for the stock trading can be attributed by the increasing number of firms listed in the Exchange. Starting with 4 companies in July 2000, there are more than 107 companies listed in the Vietnamese Stock Exchange as of the year 2006.

The Financial times reports “The recent bull-run on the formal exchange, with 107 listed companies, has been propelled partly by foreign investors, eager for exposure to one of Asia’s fastest-growing economies. ” Although the privatization of the state owned enterprises can be partly cited as the reason for the increased activity in the stock exchange the larger money supply in the hands of the people is the main reason for such a surge in the market. The larger money supply has given rise to new sets of investors in the equities of the companies.

According to Clay Chandler (2006) “Vietnam’s main stock exchange, launched in Ho Chi Minh City six years ago, is still embryonic, with 50 firms and a market capitalization of only $3 billion. But daily trading volume now tops $10 million, a twenty fold gain since January 2006. ” There were more than 30 New Public Offerings expected before the end of the year 2006. When the government’s plan to allow the shares of the large state owned enterprises in various sectors like banking, telecommunications and mining to be listed in the stock exchange and allowed to be traded freely the stock market boom in Vietnam will reach its peak.

At that point of time it is expected that the market capitalization will be almost more than $ 10 billion making the stock marketing transactions reach phenomenally higher positions. Stock Market Boom in Vietnam – Issues of Concern: The Shares of companies in Vietnam are under-priced. This is evident from the fact that the price to earnings ratio is 11. 9 in Vietnam, whereas it is 18 in China. The gross under-pricing of the securities may lead to a bubble in the market which will prove detrimental to the country’s economy in the long run. The Share market operations are relatively very less in number compared to other bigger exchanges.

“An average of just $7. 8 million of Vietnamese shares was traded daily in the past three months, compared with $18 billion on the first section of the Tokyo Stock Exchange, the world’s second-biggest equity market. ” (Bloomberg News 2006) This poses a major problem for the large investment companies to off load larger volume of shares without a price reduction. Hence if an investment firm would like to realize its entire investments in a particular share it may not be readily possible as in the case of other bigger exchanges. Hence these firms always carry this risk.

Till the year 2004-2005, the bulk of the savings of the people of Vietnam was invested in tangible and traditional assets like gold and real estate. But starting from the year 2006 there had been quite a large increase in the number of investors who indulge in stock exchange transactions. In fact the number of trading accounts in the Vietnamese Stock Market has increased from 32,000 to almost 120,000 in number. All the investments are made in stocks of companies without really bothering to see whether the companies in which the investments are made are really backed by assets.

Thus the investments represent the investments in paper assets only. This state is highly dangerous for the investors. When it is proved over time that the increase in stock market activity was just a bubble, there would be millions of dollars that the people will be losing on the paper asses as had happened in Saudi Arabia. Development of Gray Market for Stock Trading As a result of the privatization of the state owned enterprises to move on to a free economy, around 3,600 state-owned undertakings issued shares to their employees, managers and the public.

These people started selling these shares privately to acquaintances and friends through the Internet. When a deal is completed the buyer takes possession of the shares and later on gets them registered with the companies concerned. Some of the shares are not even being registered and a ‘bill of sale’ is transacted instead. Thus, the existence of a ‘gray market’ for share trading with no regulations to control and is often operated out of Internet cafes and browsing centers has become more of a gambling than a real stock trading.

These kinds of markets are called over-the-counter (OTC) market and the stocks traded are the “unlisted shares of partially privatized Vietnamese companies. ” (Kay Johnson 2007) According to Kay Johnson, “Without licensed brokers the trades are often concluded with the exchange of cash for paper shares at a local tea shop. ” This gray market has developed as a result of the desire of a majority of the Vietnamese to make fast bucks out of the economic boom being witnessed by the country.

There is no measure of the size of this market and there is no guarantee as to how secure these transactions is. Though legal there is a potential risk in these transactions. Apart from the frauds that could easily be committed there is no means of really assessing the worth of company whose shares are being traded. “Despite the dangers, the gray market is flourishing, spurred on by Vietnam’s robust growth, optimism surrounding the country’s recent entry into the World Trade Organization, and the rapid rise of sanctioned stock markets” (Kay Johnson 2007)

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