How potential is Vietnam stock market?

1. Abstract
2. Introduction

Stock markets in Vietnam has been developing expeditiously. There are more than 740
domestic companies were listed on the Vietnam stock market within only 21 years since it first
launched. The development was significant within the last 5 years where the market
capitalization of stocks to GDP (Gross Domestic Product) increased almost four time in 2019
(World Bank 2020). Then in 2021, with the Covid–19 situation, the stock market capitalization
reached VND5.6 quadrillion which accounted for 90.3% of the GDP (Nhan Dan Online 2021).
Does this extraordinary growth would help increase the market size and liquidity in long run?

This paper aims to provide an in-depth analysis of major determinants of stock market
development in Vietnam which are macroeconomic conditions and institutional factors (Ho &
Njindan Iyke 2017). The institutional condition in Vietnam has many promising programs like
privatization but at the moment, there is still lack of supports to stock markets development.
Macroeconomic conditions are likely to be supported by government. This research paper also
looks at the integration global level of market as it would be incredibly beneficial if it is
supported by better institutional factors. And lastly, the literature looks at the high possibility of
sustainable development in Vietnam.

First, the paper studies the determinants of a stock market development. Then, implicating on
Vietnam stock market and regulations, some shows applicable for potential, some are not
quite. Lastly, there is conclusion and limitation on the findings.

3. Literature Review

3.1. Institutional factors in Vietnam stock market

As La Porta et al. (1997), there are a compelling evidence that the scale of capital markets is
influenced by legal environment. Their study indicates that the more inadequate shareholder
protection the smaller the equity market. Unfortunately, the result found in Phung & Mishra
(2016) shows that stockholder protection system in Vietnam is still weak, as they should focus
on corporate governance arrangements to shield minority shareholders from being take-over
by state or foreign ownership. Additional argument supported by Perotti and Van Ojien (2001)
said completely privatization will discard the political risks in emerging market, and that would
increase the stock market development rapidly. Vietnamese government still hold a large share
in privatized sectors, which they should speed up the implementation for large scale
development of stock market (Pham & Nguyen 2019).

3.2 Global and regional integration of stock markets

International portfolio diversification is a trading strategy where investors concurrently

apportion their assets to both domestic and foreign stock market to minimize portfolio risks
(Aluko et al. 2018).

Vietnam equity markets are increasingly integrated with the global markets due to the rapid
increase of globalization and technological development. According to Mohti et.al (2019),
Vietnam stock markets associated with Japan and US markets were quite strong compared to
other frontier countries like Sri Lanka or Bangladesh. Agreed by Vo and Ellis (2018) stated that
Vietnam stock markets’ volatile and stock return nexus are stimulated by the world leading
stock markets. Foreign investors by taking the advantage of dynamic volatility and parallel
linkages, can make bigger returns and lower risk which made the Vietnam market become more
attractive (Singhal & Ghosh 2016).

However, as for the integration with regional markets, research done by Nasir et al. (2021)
indicates that Vietnam stock market has responded less to its Asian markets' shocks, even being
extremely affected in the past. This was explained by the mature of the stock market and
therefore, they are less likely to react to outer circumstances.

The different integration level between leading developed markets and regional markets of
Vietnam attracts various of the foreign investors. A study conducted by Nguyen (2017) had
proved that foreign investors have tendency to trade high in Vietnam stock markets and result
significant growth in the market.
The prospect of foreign investment would be even larger if the government of Vietnam
implicate the successfully privatization since the risk for international portfolio diversification is
even lower without political risk.

3.2 Macroeconomic Conditions

As mentioned above, the development of Vietnam stock markets in recent years is rapid, this
partially comes from the less reactive to regional markets' shock as above, but to lower the risk
for this diversification, the role of Macroeconomic policies is vital to the stock prices (Dickinson
2000). There are four common factors that will be considered in the linkage of Macroeconomic
conditions and stock markets in Vietnam, which are: inflation rate, exchange rate, GDP growth,
interest rates.

According to one of the first research paper about the impact of inflation on stock prices
concluded that high rate of inflation would limit the development of stock indexes (Bui 2019).
The author explains that sudden increase of inflation put business and the whole economy
through tough time, and investors can expect the downfall of dividends which resulted low
stock indexes. This conclusion consolidates the findings of Nasir et al. (2021), which they also
include that inflation has a negative influence on stock prices on long-term periods. Both
findings though did not include impact of low inflation on the stock exchange. Specifically,
Rousseaue and Wachtel (1998) had stated that the aim for low inflation can encourage the
exploitation of trade activities, leading to economic growth.

Exchange rate also play a key role in Vietnam equity market since the volatility of exchange rate
can decrease the size and enhance the volatility of capital flows to Vietnam (Mercado & Park
2011). The more stable the currency exchange rate, the more confident investors feel to
increase investment in Vietnam stock market (Nasir et al. 2021). Therefore, it is concluded that
strong currency has a positive influence on the development of Vietnam equity market.

The real GDP, which stated by Nguyen and Bui (2019), has positive relationship with stock
market. Specifically, they conclude that the real GDP growth was found to be influenced by the
stock market development. But the limit of this findings is that there was no certain impact of
the economic growth on the stock markets. However, Nasir et al. (2021) proved that there are
bidirectional beneficial connections of the real GDP and stock market affirm the fact that those
two are totally two different things but closely related to each other. By this association,
looking at the prediction of future GDP growth rate create better prediction for future
investments (Nasir et al. 2021).

Lastly, monetary policy is particularly important to the growth of stock markets, as it has strong
influence. A research done by Nguyen, Do and Nguyen (2016) stated that either long run or
short run, interest rates effect the stock market oppositely. Which means raising the interest
rates would result lower stock market performance. This action is typically seen after high
inflation, where state banks need to tighten up their monetary policy by pushing up interest
rates. Research shows that there is effect on short-term stock market but adversely affect firms
in long-run (Nguyen, Do & Nguyen 2016).

Vietnam government needs to set a suitable monetary policy that makes sure of the proficiency
of credit is approachable, since it is proved to increase the stock prices by Nasir et al. (2021).
After reviewing all the effective relationship between macroeconomic factors and the stock
markets, it is concluded that the stock markets in Vietnam have a positive relationship with
economic growth, which is likely to receive favorable support from government.

3.3 Sustainable Development of Vietnam Stock Markets

In order to create a healthy long run market and being attractive to both domestic and foreign
investors, sustainable development is the most crucial factor that Vietnam government need to
focus on. Currently, there is no specific journal article about how the Vietnam stock market can
evolve sustainably. Nevertheless, this research paper aims to examine possible factors that can
help the Vietnam stock market achieve sustainable growth.

Vietnam stock market as in the end of February 2021 reached 90.3% of total GDP, which is
significantly high. However, this brought the debt to GDP ratio up to 146%, a fairly high
considering the development level of Vietnam’s finance (Nhan Dan Online 2021). To lower this
ratio, Nguyen (2019) suggests that companies should higher their market value by putting out
accomplished information and perform their competitiveness. In term of government,
improving the quality of institution and governance can strengthen the capability of stock
markets (Nihal 2014).

As the Covid-19 pandemic happened, digitalization has been boosted faster than ever because
of all the lockdown and unable to go places physically. Therefore, financial technology would
become the sustainability of stock market development. Arner et al. (2020) had built a
comprehensive strategy for digital financial transformation by conducting successful implication
in India, China, Russia and Kenya. The strategy contains four pillars: creating digital identifier,
unlocking a reconcilable payment system, implicating government to person programs,
developing innovative infrastructure for financial markets in long run. These technologies do
not only more efficient to firms and professional investors but also encouraging every individual
to take part in trading even with small amounts at ease, which will create big market afterwards
(Arner et al. 2020). Vietnam has young population advantage, who are constantly ready to
experience innovative technology applications (APPOTA 2018). By being integrated with hi-tech
lifestyle, Vietnam stock market is full of potential to convert to more technology interaction (Le
2019).

4. Conclusion

To conclude, institutional factors right now in Vietnam is not favorable for the stock markets.
But by looking at the future, especially when the government fully executes the privatization
programs, Vietnam stock markets can develop promptly as it is without political risk and
attractive to foreign investors. Vietnam equity markets shows positive relationship with the
economic growth, which is inferred to high chance of receive suitable macroeconomic policies
from government that benefit the stock markets. Vietnam stock markets have an extraordinary
high market capitalization to GDP ratio which actually increasing the debt to GDP by 146% and
was considered too high for national finance. But if both listed companies and government
make effort, the market can become healthier. Lastly, Vietnam stock market is potential for
financial technology implication which can rapidly increase market size.

5. Limitations
There are several limitations that restrict the range of my review. Firstly, most theoretical
findings of this paper do not apply specifically to Vietnam, some are specifically to Europe
countries and general markets, which might not give the signify the right context. Secondly, as
mentioned above, there has not been any research about the sustainability development of
Vietnam stock market that I think it needs to be discussed. There also too little journals talking
about the institutional perspectives on Vietnam stock market, while it is the decisive element
on the development of stock market size and liquidity.

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