The Big Picture: Mongolia will show more potential when investment universe expands
Benedicte Gravrand, Opalesque Geneva:
An Opalesque column for macro investors.
Thanks to its extensive mineral wealth, Khan Investment Management , a Singapore-based manager, projects a double-digit annual GDP growth for Mongolia over the next five years. This is in line with expectations from the IMF, the World Bank and the Economist Intelligence Unit.
The rise of Mongolia
Mongolia is a landlocked country in East and Central Asia with a population of around 2.75 million people. It is bordered by Russia to the north and China. Ulan Bator, the capital and largest city, is home to about 45% of the population. Mongolia's political system is a parliamentary republic.
Economic activity in Mongolia used to be based on herding and agriculture, but extensive mineral deposits of copper, coal, molybdenum, tin, tungsten, and gold have since been a driver of industrial production. Mining is 21.8% of GDP and agriculture is 16% of GDP.
GDP, inflation, trade deficit
Its mining sector helped it grow substantially in 2007 and 2008 (9.9% and 8.9%, respectively), but its currency dropped 40% against the U.S. dollar in 2009 due to falls in commodity prices. (The Thomson Reuters/Jefferies CRB Commodity Index (CRY) index went from 467 in July 2008 to 200 in February 2009. It is at about 297 now.)
Even with a steadily rising GDP, Mongolia continues to suffer from high inflation (around 12%) and the state is still working to overcome a sizable trade deficit. The Economist expects this trade deficit of 14% of Mongolia's GDP to transform into a surplus in 2013.
"The country has certainly suffered from high inflation over the last couple of years," Travis Hamilton, managing director of Khan, told Opalesque in a recent interview. "The first half of this year inflation actually was 15%. This was largely driven by very expansionary budget of the previous government and that inflation was largely fuelled by cash handouts to citizens. It was in our view that cash handouts were aimed at securing votes during election."
After parliamentary elections in 2012 , the MPRP (Mongolian People's Revolutionary Party), which ran in the elections as the Justice Coalition with a smaller party, formed a coalition government with the Democratic Party.
Hamilton is pleased about the recent change of government and the new Minister of Finance, who outlined a policy to lower the budget deficits - and to limit the trade deficit. The plan is to limit money supply and reduce inflation back to single digits. He expects to see a reduction in GPI inflation within the first two quarters of next year.
Mongolia is ranked as lower middle income economy by the World Bank. It was listed among the Emerging markets countries in February 2011 when Citigroup analysts determined Mongolia to be one of Global Growth Generators countries, that is, countries with the most promising growth prospects for 2010–2050.
Source
China
Hamilton stresses that Mongolian growth is not predicated on Chinese growth – as this is a common misconception among international investors. Mongolian growth is purely based on the resources exports. However, when new infrastructure will be built, China may very well import a lot more from Mongolia, as this would be cheaper in terms of pricing and transport costs.
"I'll just highlight as well that until the year 2001, China was a net energy exporter," he adds. "And Australia was the largest coal supplier to China. In June 2011, Mongolia surpassed Australia as the largest coal supplier to China. All of those coal exports were taken across the border in trucks. They're not even using rail infrastructure. There is this massive dry bulk carrier that lined up on the east coast of Australia and carried millions of tons a year to China. Well, Mongolia has now exported more than Australia by simply using trucks."
Stock market
Mongolia’s stock market clocked up the best returns in the world in 2010 when share prices climbed 121% and it was the second-best performing bourse last year with a rise of 73%, according to the Financial Times. But the stock market trades for two hours a day, five days a week. Although there is an electronic board with quoted prices, Mr Kahm, manager of another Mongolia equities fund, told the FT that the quotes are meaningless because there is no volume.
The Mongolian Stock Exchange, established in 1991 in Ulan Bator, is among the world's smallest stock exchanges by market capitalisation. In 2011, it had 336 companies listed with a total market capitalization of $2bn after quadrupling from $406m in 2008.
Daniel Evans, author of The Mogul Report, a free monthly newsletter summarizing the key stories about Mongolia and firms that do business there, and partner at Khan, told Opalesque that there are few opportunities for shorting in the country. He believes this will change in the coming years, as the Chairman of the Mongolia Stock Exchange (MSE), and the London Stock Exchange (they are modernising and upgrading the MSE) estimate that there will be $45 billion of new listings on the MSE in five years. Current market capacity is approximately $3 billion, he said.
Sovereign debt
According to Hamilton, the first major issue of sovereign debt was done earlier this year through the Development Bank of Mongolia, which issued $580 million.
"We had the debt in March of 2012 and it was internal. It was priced at a yield of 5.55%. The debt was guaranteed by the Mongolian Government and the issue was actually oversubscribed 11 times," he adds. "Now the parliament is proposing to issue up to $5 billion worth of additional sovereign debt through the Bank."
New Securities Law
Apparently, a long-awaited final draft of a new Securities Law is being reviewed in Parliament. According to Khan, it should, when passed, lift current burdensome regulation and revitalise the capital markets, which will result in new listings and new capital.
A lot of the regulation in the draft was advised by the London Stock Exchange, Hamilton tells Opalesque, as the LSE is currently managing the MSE and has been asked by Mongolia’s government to provide advice.
"This new Securities Law among other things will allow Mongolian companies to be dual-listed between the Mongolian Stock Exchange and international exchanges," Hamilton explains. "At present, the current law is very burdensome, has a high amount of bureaucracy attached to it and it is not possible today for a Mongolian company that is listed on the Mongolian Stock Exchange to seek a dual-listing offshore."
The managers at Khan are looking forward to participating in the raft of new issues that are likely to come out of the stock exchange after the law is passed.
History
The area of what is now Mongolia was ruled by various nomadic empires (the Mongol Empire was founded by Genghis Khan in 1206). In the 16th and 17th centuries, the country embraced Tibetan Buddhism. At the end of the 17th century, it was ruled by the Qing Dynasty. During the collapse of the Dynasty in 1911, Mongolia declared independence, but had to struggle until 1921 to firmly establish de facto independence from the Republic of China, and until 1945 to gain international recognition. In 1924, the Mongolian People's Republic was declared, and Mongolian politics were close to the Soviet politics of the time. After the breakdown of communist regimes in Eastern Europe in 1989, Mongolia saw its own Democratic Revolution in early 1990, which led to a multi-party system, a new constitution in 1992, and transition to a market economy.
Flying to Mongolia
Khan has an office in Ulan Bator, which is run by one of the directors of the firm, who is a Mongolian. When Hamilton flies to Mongolia, he does it via Hong Kong. Back in 2010, he had to go Beijing or Seoul to get there. Now, there are daily flights from Hong Kong to Ulan Bator, which last about four hours. There may be direct flights between Singapore and Mongolia soon, he says. And there may also be flights from London to Ulan Bator.
He goes there regularly, and mentions the extreme temperatures (which can go down to -50° in winter and up to +40° in summer) as the main difference this country shows, compared to Singapore.
Khan Mongolia Equity Fund
Khan’s long-biased fund is the first open-ended vehicle with monthly dealing that invests in Mongolia-related equities – in companies that have substantial business operations or assets in Mongolia, that are listed domestically and internationally, or planning an IPO. The fund may also invest in Mongolian Tugrik-denominated fixed income instruments including both government and corporate bonds. It was launched in October 2011 and aims to capture the country’s current growth story, using a bottom up stock selection in a macro strategy. It is down 38% YTD (to end-September) and manages $2.87m.
Khan will look to deliver a multiple of GDP growth over the longer term. This year’s negative performance is due to the fund’s heavy mining and resources exposure, Hamilton says.
About 75% of the portfolio is exposed to the mining and resource sector, as the investment universe is relatively limited. There will be opportunity, however, once the new Securities Law is passed, to diversify in telecommunications, financials, power generation, power distribution, infrastructure development and agricultural opportunities.
Mongolia, as well as Canada and Australia-listed mining companies in particular have been grossly oversold, Hamilton explains: "We believe that local investors in Canada and in Australia simply sold these stocks because they are mining companies listed under a local exchange. They see falling commodity prices. They have fears of the slowdown in Chinese growth and they have not undertaken any individual company analysis. An analysis would indicate that these Mongolian mines will be producing and will be exporting even in the event or a slowdown in the Chinese economy."
The MSCI Frontier Markets (standard) index is up 0.43% MTD and 1.63% YTD. It went down 2.9% in the last three years, down 14% in the last five years and up 5.5% in the last 10 years. The MSCI Frontier Markets (Asia) index is down 0.23% MTD, down 1.7% YTD, down 9.2% in the last year and down 9.4% in the last three years. These indices do not include Mongolia. But, according to Khan, Mongolia has officially been placed on FTSE’s watch list for inclusion in its Frontier Market Index.
The country is indeed still not included among the world’s main economic players, but is working towards it.
We recently made an Opalesque video interview of Simon Potter, director at Quam Asset Management, a Hong Kong-based firm that manages a Mongolia fund. You can view the interview here: Source. He speaks about Mongolia from 05:40.
An Opalesque column for macro investors.
Thanks to its extensive mineral wealth, Khan Investment Management , a Singapore-based manager, projects a double-digit annual GDP growth for Mongolia over the next five years. This is in line with expectations from the IMF, the World Bank and the Economist Intelligence Unit.
The rise of Mongolia
Mongolia is a landlocked country in East and Central Asia with a population of around 2.75 million people. It is bordered by Russia to the north and China. Ulan Bator, the capital and largest city, is home to about 45% of the population. Mongolia's political system is a parliamentary republic.
Economic activity in Mongolia used to be based on herding and agriculture, but extensive mineral deposits of copper, coal, molybdenum, tin, tungsten, and gold have since been a driver of industrial production. Mining is 21.8% of GDP and agriculture is 16% of GDP.
GDP, inflation, trade deficit
Its mining sector helped it grow substantially in 2007 and 2008 (9.9% and 8.9%, respectively), but its currency dropped 40% against the U.S. dollar in 2009 due to falls in commodity prices. (The Thomson Reuters/Jefferies CRB Commodity Index (CRY) index went from 467 in July 2008 to 200 in February 2009. It is at about 297 now.)
Even with a steadily rising GDP, Mongolia continues to suffer from high inflation (around 12%) and the state is still working to overcome a sizable trade deficit. The Economist expects this trade deficit of 14% of Mongolia's GDP to transform into a surplus in 2013.
"The country has certainly suffered from high inflation over the last couple of years," Travis Hamilton, managing director of Khan, told Opalesque in a recent interview. "The first half of this year inflation actually was 15%. This was largely driven by very expansionary budget of the previous government and that inflation was largely fuelled by cash handouts to citizens. It was in our view that cash handouts were aimed at securing votes during election."
After parliamentary elections in 2012 , the MPRP (Mongolian People's Revolutionary Party), which ran in the elections as the Justice Coalition with a smaller party, formed a coalition government with the Democratic Party.
Hamilton is pleased about the recent change of government and the new Minister of Finance, who outlined a policy to lower the budget deficits - and to limit the trade deficit. The plan is to limit money supply and reduce inflation back to single digits. He expects to see a reduction in GPI inflation within the first two quarters of next year.
Mongolia is ranked as lower middle income economy by the World Bank. It was listed among the Emerging markets countries in February 2011 when Citigroup analysts determined Mongolia to be one of Global Growth Generators countries, that is, countries with the most promising growth prospects for 2010–2050.
Source
China
Hamilton stresses that Mongolian growth is not predicated on Chinese growth – as this is a common misconception among international investors. Mongolian growth is purely based on the resources exports. However, when new infrastructure will be built, China may very well import a lot more from Mongolia, as this would be cheaper in terms of pricing and transport costs.
"I'll just highlight as well that until the year 2001, China was a net energy exporter," he adds. "And Australia was the largest coal supplier to China. In June 2011, Mongolia surpassed Australia as the largest coal supplier to China. All of those coal exports were taken across the border in trucks. They're not even using rail infrastructure. There is this massive dry bulk carrier that lined up on the east coast of Australia and carried millions of tons a year to China. Well, Mongolia has now exported more than Australia by simply using trucks."
Stock market
Mongolia’s stock market clocked up the best returns in the world in 2010 when share prices climbed 121% and it was the second-best performing bourse last year with a rise of 73%, according to the Financial Times. But the stock market trades for two hours a day, five days a week. Although there is an electronic board with quoted prices, Mr Kahm, manager of another Mongolia equities fund, told the FT that the quotes are meaningless because there is no volume.
The Mongolian Stock Exchange, established in 1991 in Ulan Bator, is among the world's smallest stock exchanges by market capitalisation. In 2011, it had 336 companies listed with a total market capitalization of $2bn after quadrupling from $406m in 2008.
Daniel Evans, author of The Mogul Report, a free monthly newsletter summarizing the key stories about Mongolia and firms that do business there, and partner at Khan, told Opalesque that there are few opportunities for shorting in the country. He believes this will change in the coming years, as the Chairman of the Mongolia Stock Exchange (MSE), and the London Stock Exchange (they are modernising and upgrading the MSE) estimate that there will be $45 billion of new listings on the MSE in five years. Current market capacity is approximately $3 billion, he said.
Sovereign debt
According to Hamilton, the first major issue of sovereign debt was done earlier this year through the Development Bank of Mongolia, which issued $580 million.
"We had the debt in March of 2012 and it was internal. It was priced at a yield of 5.55%. The debt was guaranteed by the Mongolian Government and the issue was actually oversubscribed 11 times," he adds. "Now the parliament is proposing to issue up to $5 billion worth of additional sovereign debt through the Bank."
New Securities Law
Apparently, a long-awaited final draft of a new Securities Law is being reviewed in Parliament. According to Khan, it should, when passed, lift current burdensome regulation and revitalise the capital markets, which will result in new listings and new capital.
A lot of the regulation in the draft was advised by the London Stock Exchange, Hamilton tells Opalesque, as the LSE is currently managing the MSE and has been asked by Mongolia’s government to provide advice.
"This new Securities Law among other things will allow Mongolian companies to be dual-listed between the Mongolian Stock Exchange and international exchanges," Hamilton explains. "At present, the current law is very burdensome, has a high amount of bureaucracy attached to it and it is not possible today for a Mongolian company that is listed on the Mongolian Stock Exchange to seek a dual-listing offshore."
The managers at Khan are looking forward to participating in the raft of new issues that are likely to come out of the stock exchange after the law is passed.
History
The area of what is now Mongolia was ruled by various nomadic empires (the Mongol Empire was founded by Genghis Khan in 1206). In the 16th and 17th centuries, the country embraced Tibetan Buddhism. At the end of the 17th century, it was ruled by the Qing Dynasty. During the collapse of the Dynasty in 1911, Mongolia declared independence, but had to struggle until 1921 to firmly establish de facto independence from the Republic of China, and until 1945 to gain international recognition. In 1924, the Mongolian People's Republic was declared, and Mongolian politics were close to the Soviet politics of the time. After the breakdown of communist regimes in Eastern Europe in 1989, Mongolia saw its own Democratic Revolution in early 1990, which led to a multi-party system, a new constitution in 1992, and transition to a market economy.
Flying to Mongolia
Khan has an office in Ulan Bator, which is run by one of the directors of the firm, who is a Mongolian. When Hamilton flies to Mongolia, he does it via Hong Kong. Back in 2010, he had to go Beijing or Seoul to get there. Now, there are daily flights from Hong Kong to Ulan Bator, which last about four hours. There may be direct flights between Singapore and Mongolia soon, he says. And there may also be flights from London to Ulan Bator.
He goes there regularly, and mentions the extreme temperatures (which can go down to -50° in winter and up to +40° in summer) as the main difference this country shows, compared to Singapore.
Khan Mongolia Equity Fund
Khan’s long-biased fund is the first open-ended vehicle with monthly dealing that invests in Mongolia-related equities – in companies that have substantial business operations or assets in Mongolia, that are listed domestically and internationally, or planning an IPO. The fund may also invest in Mongolian Tugrik-denominated fixed income instruments including both government and corporate bonds. It was launched in October 2011 and aims to capture the country’s current growth story, using a bottom up stock selection in a macro strategy. It is down 38% YTD (to end-September) and manages $2.87m.
Khan will look to deliver a multiple of GDP growth over the longer term. This year’s negative performance is due to the fund’s heavy mining and resources exposure, Hamilton says.
About 75% of the portfolio is exposed to the mining and resource sector, as the investment universe is relatively limited. There will be opportunity, however, once the new Securities Law is passed, to diversify in telecommunications, financials, power generation, power distribution, infrastructure development and agricultural opportunities.
Mongolia, as well as Canada and Australia-listed mining companies in particular have been grossly oversold, Hamilton explains: "We believe that local investors in Canada and in Australia simply sold these stocks because they are mining companies listed under a local exchange. They see falling commodity prices. They have fears of the slowdown in Chinese growth and they have not undertaken any individual company analysis. An analysis would indicate that these Mongolian mines will be producing and will be exporting even in the event or a slowdown in the Chinese economy."
The MSCI Frontier Markets (standard) index is up 0.43% MTD and 1.63% YTD. It went down 2.9% in the last three years, down 14% in the last five years and up 5.5% in the last 10 years. The MSCI Frontier Markets (Asia) index is down 0.23% MTD, down 1.7% YTD, down 9.2% in the last year and down 9.4% in the last three years. These indices do not include Mongolia. But, according to Khan, Mongolia has officially been placed on FTSE’s watch list for inclusion in its Frontier Market Index.
The country is indeed still not included among the world’s main economic players, but is working towards it.
We recently made an Opalesque video interview of Simon Potter, director at Quam Asset Management, a Hong Kong-based firm that manages a Mongolia fund. You can view the interview here: Source. He speaks about Mongolia from 05:40.
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