Fundamental Strategy Urgently Needed
By Hoang Xuan Huy
The VN-Index exceeded 420 points in a recent trading session and market liquidity improved significantly thanks to comparatively low month-on-month inflation in February and interest rate cuts in some banks. However, what the market needs in the long term is a fundamental strategy, rather than short-term technical fixes.
To a large extent, macroeconomic instability was responsible for the dismal performance of the VN-Index in 2011 and the first two months of 2012. Other diseases haunting Vietnam’s stock market include appalling liquidity, rampant stock price manipulation, and the lack of information on share quality. It seems that the woes of Vietnam’s bourses essentially arise from internal shortcomings, rather than external shocks.
Stock quality: shades of grey
In Vietnam’s stock market, product quality is not only woeful but, in many cases, difficult to determine. To begin with, listed firms are not subject to stringent regulations. For example, an enterprise only needs a charter capital of over VND10 billion, a profitable business year and a few other easily acquired attributes to list on the Hanoi bourse. As a result, the quality of shares in Vietnam’s bourses varies greatly. Diversity, in this case, is a curse rather than a blessing.
Besides, the quality of shares is difficult, if not impossible, to determine owing to inadequate supervision, lax enforcement of regulations, and a woeful lack of transparency. The resultant information asymmetry, with investors with insider knowledge enjoying an unfair advantage, has eroded confidence in Vietnam’s enterprises and stock market.
Struggling securities firms
The market has witnessed two firms sliding into solvency traps; the number of companies with liquidity problems is clearly higher. The main cause of such woes is ineffective risk management, especially in prop trading and credit operations. To aggravate matters, many securities firms have been mired in lawsuits revolving around abuse of investor trust or problems in processing market orders. While investors themselves are partly to blame in many cases, the prevalence of complaints against securities firms, despite the wealth of experience and technical know-how available in the stock market, is downright unacceptable. Among more than 100 securities firms in operation, only a few have clearly categorized and separated different client accounts. Most securities companies have chosen to turn their capital into long-term bank deposits to earn short-term returns at the expense of their reputation.
The State Securities Commission and other management agencies should play a more active role in penalizing offenders in the stock market and nurturing transparency. Only then can Vietnam hope to eradicate the deleterious influence of dubious interest groups and phase out such problems as low-quality shares and stock price manipulation.
At present, companies guilty of tardy information disclosure, including repeat offenders, only receive warnings or pay small fines even though such offenses can inflict enormous damage on investors. Accountability is also an issue as there is great difficulty in pinpointing individuals who are to blame for a certain violation in the stock market. These problems must be adequately addressed.
What the market needs in the long term is a fundamental strategy, rather than short-term technical fixes.
First, it is important to review regulations on information disclosure and securities trading (to eliminate insider trading), strengthen supervision, impose more severe penalties on market offenders, and enhance accountability.
Second, the authorities should make the criteria that a listed firm must meet more stringent to ensure that products in the stock market are of high quality. This will help lure investors, improve liquidity and pave the way for stock exchanges to thrive as avenues for mobilizing medium- and long-term capital.
Third, capital adequacy criteria, risk management tools and relevant regulations must be improved, especially with regard to prop trading and credit activities. Securities firms that violate trading rules or threaten system security must be severely punished. When it comes to securities companies, what really counts is not quantity, but quality.