Vietnamese Stock Market Review

Published Date: 02 Nov 2017

1. Introduction

1.1 Background overview

1.2 Research significance

This study attempts to solve the optimization problem introduced by Harry Markowitz sixty years ago.

In the context of Vietnam stock market reviewed in previous section, the study is expected to bring out a clear and comprehensive approach of portfolio selection. Individual investors, though lack of intensive investment knowledge can effectively apply that Markowitz model to select their own optimal portfolio given their risk preference. Better investment decisions, therefore, could be made by Vietnamese investors

1.2.1 Vietnamese Stock Market Review

Right from the early 1990s, the scheme of launching the securities market was seriously proposed by the Vietnamese Government in an attempt to create a new efficient channel of fund raising and capital mobilizing for investment. On July 10th 1998, the Prime Minister of Vietnam approved and signed Decree No. 48/1998/ND-CP to set up two securities trading centers at Hanoi and Ho Chi Minh City.

Stage 1: From July 2000 TO 200: Vietnam stock market was newly born

Ho Chi Minh City Stock Exchange (HOSE), the largest stock trading center in Vietnam, was officially put into operation on July 20th 2000 under its former name Ho Chi Minh Securities Trading Center (HOSTC). There were only two stocks listed on HOSE on its first trading session and the initial index of HOSE started at 100 points. Number of listed members on HOSE increased slowly from 02 companies in in July 2000 to 32 companies at the end of 2005; however, HOSE witnessed a significant growth in market capitalization by 14 times- from VND 1,048 billion (about USD 65.55 million) in 2000 to VND 6,337 million (about USD 393 million) in 2005. That market capitalization constituted for a small part of Vietnam GDP at 0.24 percent in 2000 to 1.21 percent in 2005. During these years, Vnindex experienced unstable fluctuation in the range between 100 and 600 points. (All of these published statistics are available at the website of HOSE: www.hsx.vn)

In March 2005, the second securities trading center of Vietnam which was Hanoi Securities Trading Center (HASTC) and later renamed to Hanoi Stock Exchange (HNX) was launched. The indexes representing the two markets are the VN-INDEX and HNX-INDEX respectively. Both HOSE and HNX are supervised and regulated under the control of The State Securities Commission of Vietnam (SSC). Established in 1996, SSC is the highest executive agency which is responsible for the organization and management of Vietnam securities market operations. SSC has become a part of Vietnam’s Ministry of Finance since 2004.

In general, during early years of establishment, with a tiny number of stocks on the market, securities trading activities in Vietnam were relatively inactive. The average daily trading value was in a considerably modest range from USD 0.09 million (2000) to USD 6.8 million (2005). Vietnamese investors were virtually unfamiliar and inexperienced with the mechanism of a totally new market. It was reported that majority of the Vietnamese, except financial experts, had little idea on any investment strategies or any stock theories at that period of time.

Stage 2: From 2006 TO 2007: Vietnam stock market reached its peak

The year 2006 marked the dramatic increase in the number of listed companies. By the end of 2006, there were up to 193 companies listed on two securities trading center HOSE and HNX. Total stocks codes traded in the domestic market were 8 times greater than the entire previous trading period. Vietnam securities market reached its peak at the end of 2006 and the beginning of 2007. Trading activity was more active than ever with the average daily trading fluctuating between VND 400 billion (USD 27.5 million) (2006) and VND 1,562 billion (USD 110 million, 2007). VN-INDEX rocketed from 511 points in October 2006 to its highest level at 1,170 points in May 2007. Remarkably, market capitalization of HOSE alone constituted nearly 43% of Vietnam GDP in 2007.

With these noticeable achievements, Vietnam stock market was highly appreciated in both domestic and international newspapers with a confident and optimistic outlook. Iinternational Monetary Fund’s Chief Economist Raghuram Rajan perceived Vietnam as "the new miracle Asian" (IMF’s annual report, 2006). Simultaneously, Citigroup – the leading international bank - valued Vietnam to be "the New Powerhouse of Southeast Asia" (2006). Even Bloomberg evaluated that Vietnamese stocks are best performers in Asia as for 2006.

One of the main reasons explaining ever spectacular rise in stock market was the issue of Vietnam joining the World Trade Organization in January 2007. Integrating into the largest commercial organizations played a crucial part in attracting a huge amount of foreign investment capital into Vietnam, accordingly, domestic securities trading activities were strongly boosted.

Stage 3: From 2008 to 2009: Vietnam stock market collapsed

The global economic recession and the collapse of major international financial institutions in 2008 undoubtedly had seriously negative influence on the health of domestic securities market. After hitting its all-time high of 1,171 points in March 2007, VNINDEX plummeted to the bottom of 235 points, the lowest point ever since 2006. From the position of the best performance stock market‖ in 2006, Vietnam was proclaimed to be the most risky stock market in 2008 (Bloomberg, 2008).

It was "crowd psychology" of Vietnamese investors that further drove stock market down and resulted in bigger losses (Nguyen.T, 2008). Crowd psychology is an inefficient investment style in which investors have the tendency to behave the same as majority of people without their own careful judgment or consideration. As a matter of an emerging market, institutional investors accounted for only one-third of total securities investors while the rest two-third was individual investors. This individual investor proportion with limited intensive financial knowledge and inexperienced portfolio management were likely to imitate the crowd’s investment decisions. When the stock market was overheated in 2007, witnessing the fact that number of people had made big profit, individual investors hurried to make the Buy order, they even continued to purchase stocks, regardless the warning that Vietnamese stocks exceeded its intrinsic value by 30% at the end of 2007. As a consequence, when Vietnam stock market suffered crisis with considerably decline in value and market capitalization, most of local investors were in terribly panicking mood, they sold out stocks as fast as possible. With that massive capital outflow, the stock market condition became seriously worse.

Stage 4: From 2010 to 2013 (current time): Vietnam stock market was in its recovery, yet still sluggish

With continuous support from Government, especially the stimulus package of US $6 billion in late 2009 to stabilize macro-economic conditions, local securities market gradually recovered. After constant fluctuations throughout 2010 and 2011, VNIndex climbed to the level of 400 points in 2012. In the first months of 2013, the index is traded in the range from 480 to 510 points. These signs of improvement, however, still are not enough to re-establish investors’ confidence. The stock trading volume at the moment was merely one third of that in 2007.

According to the latest statistics published on the website of HOSE (www.hsx.vn), as of early 2013, there are 350 types of securities listed on HOSE, including 306 stocks with total capitalization value of VND228,000 billion; 05 fund certificates with volume of VND2.5 billion and 39 bond types worth VND5.461 billion. When it comes to HNX, at the beginning of 2013, total number of stocks listed on HNX is 398. Total capitalization value on HNX is estimated approximately VND250,000 billion ((www.hnx.vn). Securities that are widely traded on both HOSE and HNX are ordinary shares, bonds and fund certificates. Complex hybrids or derivatives have not yet been widely traded on these exchanges.

In brief, Vietnam stock market experiencing 13-year history of development has grown significantly and rapidly in both the number of stocks listed and value of market capitalization. The movement of VNIndex, nevertheless, has shown unpredictable instability over observed period (Figure 1.1). In addition, making investment decisions based on "herd mentality" rather than professional strategies is still popular among Vietnamese investors, especially individual investors.

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Figure 1.1: Movement of VNIndex from 2000 to 2013

1.2.2 Research significance

1.3 Organization of the thesis

There are 6 major sections included in this thesis. The first section which is Introduction presents the studied topic and briefly revises development history and current situation of Vietnamese stock market. The emphasis is particularly put on significances of the study to readers. In the second section, theories of Markowitz portfolio selection are explained in detail, accompanied with clear details of other advances which are further developed in the spirit of Markowitz model. Also in this part, previous research papers related to stock investment strategy on Ho Chi Minh Stock Exchange are fully reviewed. In the third place, Methodology part clarifies the data and sample for the study; provides concise steps of establishing efficient portfolio based on Markowitz model; demonstrates how to utilize Excel tools and add-ins to solve Markowitz problem. Findings and Discussion is the next section to illustrate study results and then make analysis on the portfolio selection and the efficient frontier. The fifth part is exclusively for practical implications of the study for Vietnamese investors. Certain limitations of the thesis and recommendations for future research opportunities are discussed afterwards. Conclusion is the last section to summarize main points and outstanding findings of the study