Mongolia Outlook 2012. World's Fastest Growing Economy

World's Fastest Growing Economy

Mongolia continued its strong performance in 2011 in terms of the pace of economic growth, equity market, exports and foreign direct investment inflows. The country's performance in 2011 has exceeded nearly all our projections we made in our Mongolia Outlook 2011 report published in January 2011. We estimate Mongolia overtook Qatar and has become the world's fastest growing economy in 2011 (the summary of key developments in 2011 is provided on pp 4-6). Investor sentiment and attractive valuations have supported the stock market and ranked this frontier market as the second best equity market globally last year. Robust international commodity prices and firm demand in China, the key market for Mongolian commodities, have boosted exports to an all-time high. Accelerated development of the Oyu Tolgoi project and investor appetite for quality resource assets have attracted a record level of foreign direct investments. We believe that Mongolia that is emerging as a key commodity supplier in Asia will continue its stellar performance through 2012 and beyond.

 
We project Mongolia to experience astonishing 20% GDP growth this year, further solidifying its undisputable position as the world's fastest growing economy in 2012. Substantial increase in exports (in particular, coal and iron ore), government spending, investments in major mining projects, primarily in Oyu Tolgoi and rapid surge in consumer spending will be the key drivers of the growth this year.
 
We remain bullish on MSE-listed equities in 2012. We expect the Mongolian equities to benefit from increased capital inflows and estimate the MSE TOP-20 Index to reach 28,000 by the end of this year, or +30% gain for 2012. We favor small caps that will outperform the index due to high growth of their businesses buoyed from low base effect and attractive valuations. We anticipate more IPOs and secondary offerings of Mongolian companies, both domestically and internationally, especially much-anticipated jumbo IPO of Erdenes Tavan Tolgoi. Therefore, we strongly recommend our clients to invest in the Mongolian local equities as the most effective way to gain exposure to the Mongolian growth story.
 
We target the Silk Road Mongolia Index (SILKMN) that includes Mongolia-focused internationally and selected locally-listed companies to reach 1,330 (+20% growth) in 2012, to be somewhat weighed down by expected subdue share performance of Ivanhoe Mines, the largest component of SILKMN index. SILKMN index finished 2011 poorly, down -27% due to negative investor sentiments toward emerging/frontier markets, triggered by the EU debt crisis and risk aversion. As a result, Mongolia-related stocks have been unjustifiably oversold last year. We advise investors to snap up the most beaten up stocks as the companies' strong fundamentals and value of their resource assets become more apparent.
 
Our key investment themes in 2012 are opportunities across asset classes - local and international equities, fixed income, private equity and real estate. Our top picks for the next 12 months among local stocks are Tavan Tolgoi (coking coal), APU (beverages), Remicon (construction materials) and Mongolia Development Resources (property). Mongolian Mining Corp. (coking coal), Prophecy Coal (thermal coal, power), Entree Gold (gold) and Erdene Resource Development (molybdenum, coal) are our top picks among the Silk Road Mongolia Index companies.

The analysis of 30 largest Mongolian and Mongolia-related companies and our respective recommendations (from "Buy" to "Sell") are provided on pp 49-79 of this report.
 
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