Solutions for risk management in securities investment at rubber finance company vietnam masters of business administration

MEIHO UNIVERSITY Graduate Institute of Business and Management MASTERS THESIS Solutions for Risk Management in Securities Investment at Rubber Finance Company Vietnam In partial fulfillment of the requirements for the degree of Masters of Business Administration Advisor: Dr Shao-Hsi Chung Co-advisor: Dr Vo Phuoc Tan Graduate Student: Le Thanh Truong December, 2010 ACKNOWLEDGMENTS First of all, I would like to thank both of two schools: Ho Chi Minh City University of Industry (HUI) in Vietnam and Meiho University(MU) in Taiwan offered me a good opportunity to take part this Master of Business Management program for the last two years I deeply thank to my advisor, Doctor Shao Hsi Chung of Meiho University for valuable guidances and suggestions as well as continuous encouragement given me to complete this thesis I sincerely thank to Co-advisor, Professor Vo Phuoc Tan of Ho Chi Minh City University of Industry for valuabe instructions and advices given me during this research Many thanks send to other Vietnamese professors and interviewees who anwer my quesions to give me ideas to finish the thesis.I have learnt a lot of other academic knowledges and skills besides my major in research During the time I stayed in Taiwan I received a lot of helps from Professor Ron Chuen Yeh, chair person of Graduate Institute of Business and Management of Meiho University and I would like to give sincerely thanks to all Taiwanese professors, administrative officers and classmates at Meiho University for all helps and supports given me during time in Taiwan I have learnt a lot of thing from Taiwan, not only academic knowledges and skills but also Taiwanese cultural experience and Taiwanese people In the bottom of my heart I never forget the memories that I spent in Taiwan Finally, I deeply grateful send to my family members, my colleagues and partners for all their cares, willing to help and support me throughout the studying process of the MBA program I Solutions for Risk Management in Securities Investment at Rubber Finance Company Vietnam ABSTRACT Vietnamese stock market is one of the emerging market in Asia, which comprises of Ho Chi Minh Securities Exchange (HOSE), Ha Noi Securities Trading Center (HASTC) and the OTC market HOSE has been in operation since July 2000 with only two listed companies with total market capitalization of about $22.5 million dollars, but there are nearly 600 listed companies with total market capitalization of more than $36 billion dollars HASTC has been in operation since March 2005 Rubber Finance Company VietNam (RFC) has operated since 1998 with main activities are coporate finance, personal financial, investmen products and other products RFC has begun to invest the porfolio of securities in Vietnamese stock market since 2003 and its operation has contributed a major part of company’s profit In the period of 20072009, RFC’s securities trading operation suffered losses due to the global criris and lack of risk management Prediction and identifying risk issue in securities investment will help investors to manage effectively stock porfolio and reduce risks in securities trading The project’s aims are to: • Seek out solutions for securities investment activities in Vietnamese stock market, generally speaking and at FC, specifically speaking • Identify and predict some kinds of the risks in Vietnamese stock market • Utilize the risks as well as opportunities for investment There are six financial experts who have extensive experiences in theory and facts about Vietnamese stock market will be interviewed with in-depth questions and open questions Questions used to ask experts based on literature reviews and suggestions of advisers before carrying out interviews The answers will be recorded by authors then analyzed, synthesized in response to the research question The results of this research will help the stock investors on the Vietnamese stock market in generally speaking and RFC particularly speaking to have a overview about the II main risks affecting stock prices, bonds in order to reduce the losses when investing in Vietnamese stock market Keywords: RFC is standed for Rubber Finance Company VietNam III Solutions for Risk Management in Securities Investment at Rubber Finance Company Vietnam Contents ACKNOWLEDGMENTS I ABSTRACT II Contents IV Tables V Figures VI Chapter1 Introduction 1.1 Overview of Rubber Finance Company 1.2 Research Background and Research Motivation 1.3 Research Purpose 1.4 Research Object, Research Scope and Limitations 1.5 Research Procedure Chapter Literature Review 2.1 Overview of the Vietnamese Stock Market 2.2 Risk of Securities Investment 2.2.1 Definition of risk 2.2.2 Types of risks in stock investment 10 2.3 Methods to Manage the Risks in Stock Investment 11 2.4 Identify Current Risks in Vietnamese Stock Market 12 2.5 Identify Current Risks at Rubber Finance Company Vietnam 15 Chapter Research Methodology 16 3.1 Research Method 16 3.2 In-depth Interview 16 3.2.1 Way of conducting interview 16 3.2.2 Question design 17 3.3 Interviewees 18 3.4 Reliability and Validity 18 3.5 Data Collection 18 IV 3.6 Analysis Methods 19 Chapter Research Results and Analysis 20 4.1 The Situation of Macroeconomic and Managing Vietnamese Stock Market 20 4.1.1 Exchange rates, inflation index, interest rates 20 4.1.2 Transparency of information on the stock market 21 4.1.3 The system laws about management and administration of the vietnamese stock market 23 4.1.4 Liquidity of the vietnamese stock market 24 4.2 The Investor’s Psychology and Improve Knowledge and Skills for Investors 25 4.2.1 The investor’s psychology 25 4.2.2 Improving knowledge and skills for investors 26 4.3 The Investment Methods for Risk Management 27 4.3.1 The portfolio investment method 27 4.3.2 Human resource foundation for securities investment 28 4.3.3 Using method of analysis and valuation of securities in an investment company 29 Chapter Implications, Conclusions and Recommendations 31 5.1 Conclusions 31 5.1.1 Solutions to strengthen securities investment risk management at rubber finance company (RFC) 31 5.1.2 Recommendations to the vietnamese stock market 32 5.2 Discussion 37 References 39 Attachment 41 V Tables Table 3-1 Summary of Experts’s Biography 18 V Figures Figure 1-1 Rubber Finance Company Vietnam Building Figure 1-2 Organization Chart of Rubber Finance Company Figure 1-3 Chart price of Ho Chi Minh City Stock Exchange from January 2007 to June 2010 Figure 1-4 Research Procedure VI Appendix Interviewee’s Response Interview Expert B Question 1: How good does the government control the macroeconomic situation for example: problem exchange rates, inflation index, interest rates in Vietnam? Answer: The government does not control exchange rate, inflation index and interest rate well Mostly, the State handles these problems instantaneously and shortly The government has no provident vision on these macroeconomic factors Vietnam is an importer; hence, the trade deficit will result in foreign currency shortage and pressure on exchange rate is very high Vietnam is a developing country; the economic growth will be accompanied with high inflation Therefore, the macro control is difficult and unstable at the moment Question 2: How obviously the information provide to investors issued by listing companies in vietnamese stock Market? Answers: In my opinion, it is unobvious Even it is difficult to search for information about a company in Internet Some Web sites of listing companies not post their financial statements, but company’s brief introduction information Furthermore, stock market administration agencies such as the State Securities Commission of Vietnam and Vietnam Securities Depository not give information to investors timely Much information which is spread for a long time is provided officially by market administrators Thus, it is very difficult and risky to make investment decisions in companies without enough information Question 3: Are the systems of laws about management and administration of the Vietnames stock market strong enough to handle operating of Vietnamese Stock Market? Answers: The answer is sure of not strength Until now the stock market has been operating for 10 years, but laws on stock market not change so much Many problems are given such as prevention from price-making, speculation, and “groups of great investors specializing in price-making” but the systems of laws on securities lack 44 prevention methods The State also has no really strong measures to control operations of the stock market The speculation is now very high in the market Question 4: How is about the liquidity of the Vietnamese stock market at the moment? Answers: The liquidity of the Vietnamese stock market is not good at the moment The market often happens in one way Everyone all buys without sale when the market increases, and struggles for sale when the market decreases, thus, the liquidity of the market is low It is difficult to stop loss for payback when the stock market declines Question 5: Do you agree that the stock investors follow the rumors, internal news, and the broker’s advices to give out their investment decisions? Answers: I find it rather unreasonable but it is right If researching and deciding by itself, it will be different from everybody, but the stock often follows the crowd If I were in this shoe, I will select rumors, internal news and advices to recheck them However, I recognize that most people now invest in stock following them Question 6: How to increase the knowledge and skills for Vietnamese investors to create a stable and sustainable stock market? Answers: It is a must to help the investors understand purposes of stock investment because the majority of investors are speculative at the present From that, they equip and prepare their knowledge about stock investment by themselves Question 7: How you think when people saying the portfolio investment method is the good way for risk management in stock market? Answers: The portfolio investment is not good in the Vietnamese stock market at the moment because we can’t have enough information to correctly assess types of shares in the portfolio Question 8: Do you think that the invest decisions in an investment company launched by a team of experts are better than an individual? Answers: In my point of view, it is better to make the investment decisions by a group Individual often evaluates problems subjectively A group will have different opinions on investment decisions, so it will limit investment mistakes 45 Question 9: Do you agree that the method of analysis and valuation of securities in an investment company are very important factors in securities risk management? Answers: According to me, the method of analysis and valuation of securities is one of securities risk management methods but not very important to the Vietnamese stock market Because a part from two methods, there are various methods to limit securities investment risk 46 Appendix Interviewee’s Response Interview Expert C Question 1: How good does the government control the macroeconomic situation for example: problem exchange rates, inflation index, interest rates in Vietnam? Answer: In my opinion, the government controls the macroeconomic situation poorly All macro parameters such as exchange rates, inflation index and interest rates are always passive The government handles them shortly Basic interest rate in Vietnam, for example, the Governor of the State Bank gives on monthly basis, commercial banks usually remain passive in their loan making and capital mobilization Another problem is exchange rate that has very high difference between the official interbank market and the black market Today’s difference is 10% The reason for this is that a person who wants to buy USD for traveling, payment for import contracts, and so on is very difficult to buy it at commercial banks, he/she must buy it in the black market, where always has strong response based on the law of supply and demand Therefore, USD price increases in the black market, even the government finds it difficult to inhibit Question 2: How obviously the information provide to investors issued by listing companies in vietnamese stock Market? Answers: According to me, the information which provides to investors issued by listing companies is at average level because they only provide information as requested by state management agencies, this means the information is for countermeasure Companies have no highest consciences and responsibilities for providing information to shareholders and investors Therefore, the investors, even shareholders are very vague about corporate operations Quarterly report is made once for three months, but obviously, corporate managers can give their operation forecast of the current period to the investors in two months or over Thus, there is not high equality about information of the listing companies for small and internal shareholders Question 3: Are the systems of laws about management and administration of the Vietnames stock market strong enough to handle operating of Vietnamese Stock Market? 47 Answers: In my opinion, the systems of laws about management and administration of the stock market are strong enough to control and operate the Vietnamese stock market However, we should more better infringement sanctions which should not be too unspecific Recently, the first case of securities price-making is taken criminal proceedings This is a good sign, and according to me, law executors should control more strongly so that laws on securities are deterrent enough for the market in the future Question 4: How is about the liquidity of the Vietnamese stock market at the moment? Answers: The liquidity of the Vietnamese stock market is average at the moment Some types of shares called Blue chip have good liquidity However, the liquidity of the whole market is unequal for securities codes In general, companies with business prosperity, obvious information and market capitalization of over USD 100 million have rather good liquidity, but small securities have poor liquidity Question 5: Do you agree that the stock investors follow the rumours, internal news, and the broker’s advices to give out their investment decisions? Answers: In my opinion, it is right At present, most personal investors of the Vietnamese stock market often follow unofficial information, rumors, internal news and brokers’ advices rather than they analyze by themselves This is sometimes rational because self-analyzing, they don’t know which price is reasonable Honestly, the price of securities is expensive or cheap depending on market sentiment If macroeconomy is stable and the world market is good, the investors can accept high P/E, but when the crisis occurs, they sell at any price regardless of good or bad securities Therefore, the investment which follows the crowd is sometimes profitable, especially for our young market Question 6: How to increase the knowledge and skills for Vietnamese investors to create a stable and sustainable stock market? Answers: It is necessary to organize training channels to help people understand the stock market more It is a must to make them know the stock market is a profitable investment channel apart from traditional investment channel such as bank savings 48 deposit or gold reserves Profit of securities is dividend and prospect of listing companies Basic securities training programs should be opened regularly Electronic price bulletin should be located at public places so that people can gradually learn about and self-study the stock market Question 7: How you think when people saying the portfolio investment method is the good way for risk management in stock market? Answers: The portfolio investment is not good in the Vietnamese stock market at the present In my opinion, personal investors who are often small investors should analyze and select one to two investors because it is good and easy to monitor daily price movement It is very difficult to control risks for spreading investments on the portfolio basis because the characteristic of a new merging stock market like the Vietnamese stock market is that when the market is up, most codes also up, and when the market is down, all codes down Question 8: Do you think that the invest decisions in an investment company launched by a team of experts are better than an individual? Answers: In my point of view, investment decisions which are made by a group are improbably better A team of experts will give multi-sided view of shares rather than an individual However, stock-jobbing made by a group will be late to catch up with the progress of stock market Essence of the listing stock market is very sensitive Thus, we should consult the investment council, but investment decisions made by an individual will be better Question 9: Do you agree that the method of analysis and valuation of securities in an investment company are very important factors in securities risk management? Answers: According to me, it is right In order to know whether the securities are good or not, we must analyze that company in respect of basic indexes and rationally valuate to buy them If the market is down deeply, we should buy those securities and sell them when meeting expectation If the market is down too deeply, by analysis, we still know our securities are good, we will feel more secure Therefore, the method of analysis and valuation of securities can limit risks in securities investment 49 Appendix Interviewee’s Response Interview Expert D Question 1: How good does the government control the macroeconomic situation for example: problem exchange rates, inflation index, interest rates in Vietnam? Answer: Generally, the macroeconomic situation is unstable in 2010 The government does not control the exchange rates, inflation index and interest rates well Depreciation of Vietnamese dong, the two-figure inflation index and high increase in interest rate negatively affect Vietnamese economy, especially the stock market Question 2: How obviously the information provide to investors issued by listing companies in vietnamese stock Market? Answers: In my opinion, listing companies provide their information to investors well and fully However, the Vietnamese stock market fluctuates irregularly Constant waves of shares often occur, fluctuation of securities price is very irrational without basing on business operations of listing companies Infiltrative transactions of internal shareholders still take place regularly Question 3: Are the systems of laws about management and administration of the Vietnamese stock market strong enough to handle operating of Vietnamese Stock Market? Answers: There are the systems of laws on securities and the stock market and enough for safe and effective operation of the market However, supervision and management systems of securities transaction are ineffective The law on securities has shortcomings and is now adjusting step by step in accordance with the development of stock market In general, the current law systems are able to control the operations of the stock market Question 4: How is about the liquidity of the Vietnamese stock market at the moment? Answers: The Vietnamese stock market is increasing in scale and quality of listing companies The liquidity of securities is improved significantly for each year 50 Average transaction value is about USD 128 million per day in Ho Chi Minh City Stock Exchange (HOSE) This figure is satisfactory; however, it is modest in comparison with the stock market in the region Question 5: Do you agree that the stock investors follow the rumours, internal news, and the broker’s advices to give out their investment decisions? Answers: At present, because most individual investors lack knowledge of securities and stock market, they often follow the rumors, internal news and the broker’s advices In addition, the investors’ crowd psychology and professional shortage also form the above investment method Question 6: How to increase the knowledge and skills for Vietnamese investors to create a stable and sustainable stock market? Answers: In my point of view, it is necessary to implement following methods: • To strengthen popularization, propagation and introduction about the stock market for the public • To educate knowledge about securities and stock market for the public through training courses on fundamental analysis of securities, technical analysis, and etc • To provide references about securities and stock market widely on mass media so that people are easy to approach and study • Schools which specialize in economic and financial training should facilitate students to contact and study securities and stock market more Question 7: How you think when people saying the portfolio investment method is the good way for risk management in stock market? Answers: The portfolio investment is a good way for risk management in the stock market The portfolio includes types of securities such as bond, share and fund certificate with certain rates Therefore, the portfolio investment will keep safety and ensure profit when the market fluctuates Question 8: Do you think that the invest decisions in an investment company launched by a team of experts are better than an individual? Answers: 51 According to me, collecting opinions and then making investment decisions will be always better than doing by an individual Question 9: Do you agree that the method of analysis and valuation of securities in an investment company are very important factors in securities risk management? Answers: In my opinion, they are two important factors to minimize securities investment risks 52 Appendix Interviewee’s Response Interview Expert E Question 1: How good does the government control the macroeconomic situation for example: problem exchange rates, inflation index, interest rates in Vietnam? Answer: In my opinion, the government controls the macroeconomic situation not well Typically, the inflation index exceeds figures (it is projected 7-8% by the government); other criteria such as exchange rates also change unusually, the difference between the interbank and black market rate is 10% The interest rate is also very high; there are now banks mobilizing capital with 17% per year This indicates the uncertainty of macroeconomic management of the government Question 2: How obviously the information provide to investors issued by listing companies in vietnamese stock Market? Answers: Listing companies are now more aware of providing their information to investors However, their quality of financial statements is not appreciated They only give quarterly income statements with cursory notes to financial statements The investors can’t forecast future profits or corporate cash flow correctly if the received information is uncompleted Question 3: Are the systems of laws about management and administration of the Vietnamese stock market strong enough to handle operating of Vietnamese Stock Market? Answers: In my viewpoint, the systems of laws on securities and stock market are strong enough; and laws about management of the stock market is gradually perfecting Recently, there has been a case of violating the stock market that was taken criminal proceedings This brings pleasure to investors so that they can trust in the stock market Question 4: How is about the liquidity of the Vietnamese stock market at the moment? Answers: 53 The liquidity of the Vietnamese stock market is at average level Several transactions have relatively good liquidity; the whole market trades approximately USD 500 million per day However, it occurs irregularly The market is sometimes very active but sometimes is too dull; nobody sells securities Besides, few listing companies have good quality; therefore, they don’t attract the capital resources from corporate investors and foreign organizations This also influences the market liquidity Question 5: Do you agree that the stock investors follow the rumors, internal news, and the broker’s advices to give out their investment decisions? Answers: I agree with this point of view At present most are individual investors who have no enough time and knowledge to correctly judge which securities are good and not good Thus, they must rely on the brokers’ advices Not most brokers have enough standards to give exact advices; even they also follow rumors and are the factors making rumors Question 6: How to increase the knowledge and skills for Vietnamese investors to create a stable and sustainable stock market? Answers: In my opinion, in order to improve knowledge and skills of Vietnamese investors, the competent agencies must often hold securities training courses widely In addition, the subject of basic securities should be obligatory to all universities specializing in economics Universities should usually open virtual securities courses for students to practice securities transactions Staff of securities companies should come to securities training courses to mobilize participants to open transaction accounts and focus on securities investment Firstly, they only need a small amount, and after getting used to it, they will invest a greater amount Education by practice is most effective and fastest Question 7: How you think when people saying the portfolio investment method is the good way for risk management in stock market? Answers: In my point of view, the portfolio investment is good way to limit risks It is said that “Don’t put all your eggs in one basket.” Therefore, when the portfolio investment is made, we can balance the cash, share and bond, as a result the safety will be higher and risks are lower 54 Question 8: Do you think that the invest decisions in an investment company launched by a team of experts are better than an individual? Answers: From my viewpoint, investment decisions made by the investment council are often better than those made by an individual because such decisions of a council will be more objective, so they will limit subjective and unidirectional limits Question 9: Do you agree that the method of analysis and valuation of securities in an investment company are very important factors in securities risk management? Answers: In my viewpoint, they are two very important factors If we analyze and valuate correctly, we will take correct action If we buy shares with good basic indexes, we will not worry about them even if the market always changes even towards bad trend; we believe that our shares will be exactly assessed in the future 55 Appendix Interviewee’s Response Interview Expert F Question 1: How good does the government control the macroeconomic situation for example: problem exchange rates, inflation index, interest rates in Vietnam? Answer: In my opinion, the government now gradually controls the macroeconomic situation much well However, the government should give long-term vision about macro policies such as laws on securities, interest rate, and inflation index, so that investors will feel secure about investment in the Vietnamese stock market The stock market is of truth, if there is belief, it will be stable and developed On the other hand, Vietnamese Dong is depreciated in comparison with USD Almost other currencies in the region and over the world raise price against USD but Vietnamese dong is devalued at 10%, because our country is a great excess of import and balance of payments is unsecured The government should manage so that people can trust in domestic currency Question 2: How obviously the information provide to investors issued by listing companies in vietnamese stock Market? Answers: Information of listing companies is now mainly given as lawful requirement and the Vietnam Securities Depository Enterprises don’t initiatively provide valuable news to investors for their reference and more exact assessment Most internal news and information affecting share price are known in advance by internal shareholders or their relatives, and they use these news to buy and sell securities to seek profits This is inequitable among investors The competent agencies must strictly treat such cases Question 3: Are the systems of laws about management and administration of the Vietnamese stock market strong enough to handle operating of Vietnamese Stock Market? Answers: At present, the systems of laws on securities are gradually to be in conformity with the market and enough strength to control the market’s operations Nevertheless, 56 the law enforcement agencies must more strictly handle violation in operations of the stock market such as share price-making, sale and purchase on internal news basis, etc Question 4: How is about the liquidity of the Vietnamese stock market at the moment? Answers: The liquidity of Vietnamese stock market is low at the moment However, in recent time, number of listing companies increase strongly, the liquidity is gradually perfective Question 5: Do you agree that the stock investors follow the rumors, internal news, and the broker’s advices to give out their investment decisions? Answers: It is only correct to individual investors, but organizational investors and investment companies have enough personnel, knowledge and information to analyze and judge the market in their own way Our transactions are now made online, thus, participants directly coming to securities companies are few and they analyze and buy and sell securities by themselves at home Question 6: How to increase the knowledge and skills for Vietnamese investors to create a stable and sustainable stock market? Answers: In order to improve knowledge and skills for Vietnamese investors, we must open basic training courses on securities with low tuition regularly and continuously There should have television show and meeting about the stock market to help interested-insecurities persons learn about and study the securities Large screens representing securities code and daily price should be put at public places to attract people’s care and help them gradually understand that securities is an investment channel apart from gold, foreign exchange and real estate investment Question 7: How you think when people saying the portfolio investment method is the good way for risk management in stock market? Answers: “Don’t put all your eggs in one basket” is an advice which I listen to many times and many investors also agree with, but I don’t approve this investment method absolutely Ability and concentration of each person is restricted Supervision of too things at a same time will highly increase risks It is said that “One occupation is better than nine”, it means if we want to know and everything, we will get nothing 57 most effectively Investment is the same, being afraid of loss, you diversify your portfolio Your time, money and strength are limited, but the portfolio is longer and longer This sometimes makes you not retain your “eggs” in the basket You re-check effectiveness and strictly take inventory the growth rate of your whole portfolio I believe if you get profit rate, it will be not high as compared with your loss as well as time and effort to manage the portfolio Question 8: Do you think that the invest decisions in an investment company launched by a team of experts are better than an individual? Answers: In my opinion, investment decisions made by an investment council are unlikely better than those made by an individual Many people discussing will handle nothing For many investment councils, their members have different specialty and occupation, and different vision on business lines For example, Mr A knows thoroughly the steel industry; Mr B and C know finance and real estate industry respectively, therefore, when making investment decision, they will defend their viewpoint and it is difficult to get uniform decisions This makes investment heavy and mechanical Question 9: Do you agree that the method of analysis and valuation of securities in an Investment Company are very important factors in securities risk management? Answers: In the Vietnamese stock market, the factor influencing the share price is often psychology As a matter of course, when analyzing and valuating securities price, we will more deeply understand these securities Sometimes the stock market decreases from over 1,000 points to approximately 200 points, all analysis methods are useless at that time but lead to counter effect For example, I analyze the share A and find that 50,000 dongs per share is rational However, in the market of Vietnam Index with 1,000 points, that price is reasonable, but when Vietnam index is 200 points, the same share is too expensive I think that the crowd psychology is leading the market in the Vietnamese stock market 58 ... when investing in Vietnamese stock market Keywords: RFC is standed for Rubber Finance Company VietNam III Solutions for Risk Management in Securities Investment at Rubber Finance Company Vietnam. .. VI Solutions for Risk Management in Securities Investment at Rubber Finance Company Vietnam Chapter1 Introduction Chapter includes: (1) Overview of Rubber Finance Company: support some informations... risk Inflation makes input costs of firms increasing, increasing the nominal interest rate therefore it affects to price of securities Inflation risk directly affects to business operations of