Mongolia - Promising emerging market

An investment opportunity exists because it is overlooked, under-researched and/or considered boring or too risky or “exotic” by institutional investors.

For example, a well-known multinational bank was in Dubai for over 60 years but funnily enough, it did not provide its customers access to Dubai’s stocks until late 2006.

At that time, Dubai’s stock market had already surged 190% and Emaar Properties, a property developer and the darling of the UAE stock market, had increased from AED3.80 to AED28, a gain of 636%.

Many clients of the bank claimed that it only promoted “safe” international stocks such as General Motors and Citibank when significant gains could have been made in the Gulf Cooperation Council (GCC) and Arab emerging stock markets.

When the multinational bank started to offer Dubai and Arab stocks to clients, Emaar Properties was already trading at its all-time high of AED28.

Then, the stock steadily declined to hit a low of AED1.

The real lesson is that the time to buy (a market) is when there are hardly any major international banks offering (promoting) this destination.

Conversely, when major foreign banks start to promote a country or investment theme in earnest and you are given an armful of marketing and glossy brochures; it is usually the time to sell.

With this context, consider Mongolia. This country in central Asia is a promising emerging market, at least for now. Most investors think of Mongolia in the context of Genghis Khan, an extraordinary man from a remote corner of the world who created an empire. Now, Mongolia has a very different tale to tell — one about gold and mining.

According to the World Bank, Mongolia was the world’s fastest-growing economy in 1H2011 at 17.3% y-o-y. This growth is expected to increase to 30% to 35% a year after Oyu Tolgoi, said to be the world’s largest undeveloped copper-gold project, starts operating in 2013. It is located in the South Gobi region of Mongolia, about 550km south of its capital, Ulaanbaatar.

Another mine, Tavan Tolgoi, is considered by geologists to be the world’s largest untapped coking coal deposit. Coking coal is a key ingredient used in steel making and rapid industrialisation in Asia, especially in China and India, is prompting miners and other investors to step up their search for reserves.

Although the country is obscure, its people are modern and trendy. Ulaanbaatar boosts a Louis Vuitton shop and an APPLE store. Mongolian Airlines has started a direct flight to Hong Kong to bring even more investors and venture capitalists to Mongolia.

Renowned commodity investor, Jim Rogers, travelled extensively in Mongolia in 1999 when the Mongolian Stock Exchange (MSE) was trading at 814 points. At the time, he referred to the country as “Digital Mongolia”. Today, the MSE is trading at about 20,046 points and many local nomads are already using mobile phones, Internet banking and stock trading accounts.

With a return of 136% last year, the MSE was the best-performing stock market in the world and it is likely to repeat the feat this year. Mongolia’s mining sector currently accounts for 28% of the country’s GDP and a number of sectors such as construction, retail and transport are also closely linked to its mining industry. A one-year fixed deposit makes a return of 13.4% and the local currency, the Mongolian tugrik, was the best performing currency against the US dollar among 172 currencies tracked by Bloomberg.

When it comes to investing, I always think of a Chinese proverb that goes “Fortune favours the brave and the prepared mind”. Singapore’s Temasek and China Investment Corp (both are state-owned investment companies) are already scrambling to gain exposure to Mongolia but most investors have yet to capitalise on the country’s compelling growth story. For the next few years, Mongolia is one of the best global growth stories and early investors should be richly rewarded in the coming years.

Ivanhoe Mines’ Oyu Tolgoi project (listed in New York under ticker: IVN) is expected to produce 450,000 tonnes of copper a year and 330,000 ounces of gold a year when it reaches top productivity around 2018.

At that time, I expect most banks to start packaging and promoting funds investing in Mongolia and most international banks will have a presence in Ulaanbaatar. In my opinion, that is probably the time to sell (your Mongolian equities), especially if there is a lot of talk about Mongolia on CNBC. 

Michael Preiss is an investment adviser
Written by Michael Preiss of theedgemalaysia.com