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MONGOLIA: OPPORTUNITIES IN THE FINAL FRONTIER

By Michael Preiss

18 January, 2011

THE COMMENT MARKETS 101

MONGOLIA: OPPORTUNITIES IN THE FINAL FRONTIER

Still a byword for remote obscurity, the central Asian is also the most promising emerging market in the world - for now, at least.

MICHAEL PREISS

Mongolia is a highly leveraged call option on the mining and China growth story and in 2010 it is the best "carry trade" in the world.

Most investors know about Mongolia in the context of Genghis Khan, and the startling history of how one extraordinary man from a remote corner of the world created an empire that led the world into the modern age.

Today, Mongolia is a highly leveraged call option on the mining and China growth story and in 2010 it is the best "carry trade" in the world. China with over 1 billion people and GDP growth of +11.9 per cent is desperate for raw materials.

The Tavan Tolgoi mine is considered by gologists to be the world's largest untapped coking coal deposit and Oyu Tolgoi is the world's largest untapped gold-copper deposit. According to various estimates, Mongolia's economy could grow +30-35 per cent per year after the mines start operation. The local currency, the Mongolian Tugrik (MNT) is, according to Frontier Securities, forecasted to appreciated by about 10 per cent against the US dollar.

With one year rates at +15 per cent and inflation at +5 per cent, Mongolia has one of the highest real interest rates in the world. Mongolia today is predominatedly about mining and natural resources. But Jim Rogers, who travelled extensively in the country 1999 when the Mongolian Stock Exchange was trading at 814, already called it then "Digital Mongolia". Today the MSE is trading 10,300 and many local nomads have mobile phones, internet banking and stock trading accounts.

As the Bloomberg World Mining Index is trading close to its historic all time record high, Mongolia is the best performing Asian Stock Market and the second best performing stock market in the world year-to-date.

Mongolia's mining sector amounts for 28 per cent of GDP and a number of industries like construction, retail and transport are also closely linked to the mining. Since the beginning of January 2010 the MSE (Mongolia Stock Exchange) Top 20 Index has surged 71 per cent.

Remember Dubai and the Dubai Financial Market (DFM) in April 2005? In the spring of that year, the Dubai market had risen about 70 per cent, only to close the year at 190 per cent and finish as the world's best performing market in 2005.

Singapore's Temasek and the China Investment Corporation are scrambling to gain exposure to Mongolia while most other investors still seem to be unaware of the compelling macro economic growth story,

Like Dubai in early 2005, the time to make serious money was when you could easily get parking outside the DFM and not when the parking lot was full and everyone wanted to get in on the action, i.e. mid 2006 and just before a major correction.

Very often the reasons why the investment opportunity exists in the first place is because it is largely overlooked and under-researched and considered boring or too risky or too "exotic" by many.

HSBC as an institutiion has been in the UAE for over 60 years but funnily enough it did not provide access to local stocks to local nor international clients alike until late 2005. At this time, the market had already surged 190 per cent and Emaar Properties, the darling of local UAE stock market, had surged from Dh3.80 in September 2004 to over Dh28 in September 2005.

Many Arab and local client complained that HSBC only wanted to sell international stocks and global markets, when during these years, the real action was in GCC and Arab emerging stock markets. In November 2005, HSBC finally started to offer UAE and GCC local stocks to clients just as Emaar was trading at all time record highs of Dh28.

The real lesson here, however, is that whenever hardly any foreign major bank covers a market it is often time to buy. Conversely when major international banks start to promote a country or investment theme in earnest and with lots of marketing and glossy brochures, it is often time to sell.

The good news is that there is no international foreign bank present in Mongolia yet. The $4.1 billion Oyu Tolgoi project is expected to produce 450,000 tonnes of copper per year and 330,000 ounces of gold per year when it reaches top productivity around 2018. Bythat time international banks most probably will have offices in Mongolia and maybe then it is time to sell. But for the next few years, Mongolia is one of the best global macro stories and earlier investors will be richly rewarded over the coming years.

Michael preiss is an investment advisor and finance professor and can be reached at: [email protected]