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In many ways, 2002 was a good year for the burgeoning private sector in Vietnam. The number of private firms continued to grow markedly, thanks in large part to an increasingly conducive, business-enabling environment. The regulatory regime has become much more supportive of private firms, and recent changes to the Constitution now recognize the important role that the private sector can play as an engine of economic growth. Crucially, bank credit for private firms has been in greater supply of late, and both private and state-owned banks are becoming more adept at providing loans to small and medium-sized enterprises. After past disappointments over the restructuring of the state-owned enterprise sector, recent strides made in the private sector have been very heartening.
But despite this broadly positive backdrop, Vietnam’s fledgling stock market, launched in July 2000, had a more lack-lustre 2002, with the index slightly down on the year. The total market capitalization remains frustratingly below US$200 million, and the number of companies listed was just nineteen in early December 2002. The reasons for Vietnam’s equity market doldrums are numerous. As in China, the stock market in Vietnam largely contains semi- or fully-divested former state-owned enterprises. Just one of the nineteen listed companies had actually enacted a public share offering on the stock market; the rest were ‘equitised’ long before trading on the stock market began. Consequently, the market is providing a simple trading platform for shares in the listed companies, rather than serving as a vehicle for companies to raise equity capital.
Since its launch, the official stock has increased trading from three days to five days per week, albeit limited to just one hour each morning. And a tight trading band prevents share prices rising or falling by more than a few per cent each day. (The band widened from 3 to 5 per cent on 1 January 2003.) Little wonder the stock market lacks much zest. More vigorous share trading often occurs in Vietnam’s informal ‘grey market’ of equitised company shares. Trading in these shares becomes most fervent when speculation mounts that a company is preparing to list on the formal stock market. The vast majority of investors on both the official and unofficial stock markets are retail ‘punters’; and speculation-driven sentiment – rather than more fundamental analyses of companies’ performances – tends to drive most trading activity.
In its first year of trading the stock market index inexorably rose on every trading day, prompting affluent urbanites to open an account with one of a handful of securities companies. But as the index subsequently declined – and has failed to revive - from its unsustainable highs of mid-2001, only a hardcore of ardent retail investors remain actively engaged in the official stock market. Thus far, Vietnam’s stock market regulators have focused on generating an adequate ‘supply’ of company shares to trade on the stock market, rather than on the ‘demand’ of investors to buy this equity paper. This has resulted in a conundrum: with anaemic demand for new shares, it is hard to introduce new companies to the stock market without share prices (and the overall market index) falling further, which deters investors and potential listee companies alike.
One solution is to introduce more institutional investors to the market, to significantly bolster demand for equity paper. But most foreign institutions tend to keep away from stock markets at such low capitalization and trading volume levels. Therefore, stock market regulators are beginning to look at developing the enabling environment that surrounds the official stock market, and are attempting to build up a community of local institutional investors that can provide the kind of financial sector platform on which the equity market can become more robust. If so, they should be able to attain their target of doubling the number of listed companies each year.
WATCHPOINT: In 2003 look out for moves by Vietnam’s capital market regulators and other domestic institutional investors to introduce mutual funds in a bid to get the stock market out of its current rut.
About our company:
AFG Venture Group is an Asia and Australia based corporate advisory and consulting firm with over 20 years experience in creating alliances, relationships and transactions in Australia, South East Asia and India; including a 15 year history of corporate and equities advisory in Australia, undertaking merger, acquisition, divestment, fund raising and consulting for private and public companies.
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