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Gossip, greed distort emerging markets

Update: November, 19/2009 - 00:00

Business Beat

(20-11-2009)

Gossip, greed distort emerging markets

by Dieu Thuy

Gold fever struck a couple of weeks back, as word-of-mouth helped spread news of gold prices jumping from VND24 million to as high as VND30 million per tael in a period of just four days. A lot of people grabbed their ready cash and rushed to gold shops to get in on the action.

A number of these were stock market investors, feeling the pinch from a recent State Securities Commission decision to choke off the practice of stock brokerages making loans to investors to finance stock investments (also referred to as "leverage"). The nation’s leading market indicator, the VN-Index, began to fall back from record highs of about 600 points back to around 530 as investors shifted capital from stocks to gold.

Disturbed by the impact on stocks of rumours and speculative fever on the gold market, the State Securities Commission even asked the Ministry of Information and Communications to take some action to clamp down in general on rumours harmful to the stock market.

Some fairly outlandish rumours have occasionally impacted trading. One rumour had it that the director of a well-known stock brokerage had died, while another spread the word that a prominent securities company was about to file bankruptcy.

Phil Cuiliseas, a psychological investment analyst from an US market research institute, called rumours a common aspect of human communication in every aspect of daily life.

People gossip to share information, according to Cuiliseas. They do it on the basis of reciprocity ("I’ll scratch your back if you scratch mine"), to harm the reputations of others, or to deliberately introduce erroneous information.

Some research institutes have even studied rumours in order to turn them into a more effective tool for government or business development.

Nevertheless, the negative effects of rumours were hard to avoid, especially in equity markets. "Playing tricks sometimes makes money," he said.

Nguyen Minh Tri, a market analyst with a HCM City-based fund management company, said that shortages of official sources of news and information was a cause of gossip on the domestic market.

"In Viet Nam, investors always base decisions on rumours and insider information as official sources of news are poorly provided and enterprises are not yet transparent enough to provide information," Tri said.

The consequence was a herd mentality which tended to compound the impact of rumours on the market.

"Rumour mongers strike on the greed and fear of inexperienced investors, seeking profit on the beliefs of other investors," said Ha Noi-based economist Nguyen Tri Thanh.

"But the penalties for rumour mongers are not strong enough to stop them," added Tri, noting that, in some neighbouring countries, deliberately spreading false rumours can bring jail time.

The harm to emerging markets was considerable, suggested Thanh, pointing to the problem of an incomplete regulatory framework which restricts more creative trading methods, forcing investors to respond to rumours simply by buying or selling.

"Whomever you blame, investors are the main victims of these tricks," Thanh said, suggesting investors facilitate themselves with sufficient education for making investment decisions. They need to be aware and able to realise what information is reliable enough on which to base a decision, and what’s just baseless rumour. — VNS

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