Mongolian Stock Market: Capitalizing on Frontier Opportunities

The Mongolian Stock Exchange (MSE) had an impressive year in 2010 as the best performing equity market globally. Driven by positive investor sentiments, the market still retains the title this year, climbing +64% YTD (+73% in US$ terms due to a 4.9% YTD appreciation of the MNT against the US$ as of March 31). We anticipate such strong performance will continue throughout 2011, fuelled by resource‐linked investments and developments.

The MSE Top Index, the benchmark for the country’s domestic equities, hit our projected level of 20,000 two weeks (on January 26) after we released our 2011 end‐year estimate in our Mongolia Outlook 2011 report (January 11, 2011). The benchmark continued its rally to peak at 32,955 (increasing 123% YTD) on February 25. The MSE has since seen a 27% correction, falling to 24,187 as of March 31. In our view, the rally was driven by over speculation and did not reflect the market fundamentals. This sharp volatility is the result of low liquidity and small free‐float of listed companies. Since the start of the year until February 25, the MSE gained US$1,736mn in total market capitalization with a total trade volume of US$7.9mn (or slightly over US$210,000 in average daily trade). During the following correction, US$780mn in total market capitalization was lost through a mere US$388,000 daily trade volume. In our view, low liquidity will remain a concern in 2011.

We expect the MSE to enjoy growing investor interest thanks to a strong economic outlook in 2011 and beyond. The country’s GDP is expected to grow at least 10% this year and continue double‐digit expansion annually for the rest of this decade.

The MSE is expected to retain its title among the top three equity markets in 2011, if not the best. In this report, we revaluate and update our equity ratings for the Top Index‐listed stocks and include five additional companies based on their strong earnings outlook. We also expect that the fixed income market will offer attractive opportunities on future appreciation of the national currency, the Mongolian tugrik.

Our 2011 year‐end target for the MSE Top Index has been upgraded to 27,500 (from previous 20,000) that represents +15% upside to current level and +86% for 2011. The rationale for the upward revision are stronger outlook for prices for the Mongolian export commodities (coking and thermal coal +6% by end-2011); expected economic growth of 10.3% projected by IMF; estimated +60% y‐o‐y surge in physical volume exports in 2011; and as a result along with resources stocks, MSE‐listed non‐resource companies are also expected to experience robust earnings thanks to strong performance in the resources sector. The long‐awaited IPO of Erdenes Tavan Tolgoi and the LSE’s modernization of the MSE are also likely to boost the MSE and overall investor sentiments.

Our top picks in 2011 are Tavan Tolgoi (coking coal), Sharyn Gol (thermal coal), Mongolia Development Resources (real estate) and APU (beverages).

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