COMMENT: Taking stock in Mongolia

By bne IntelliNews January 21, 2011

Sardor Koshnazarov of Eurasia Capital -

Mongolia produced a truly impressive performance in 2010, having the world's best performing equity market, the second fastest growing economy and the second best performing currency. Driven by strong resource-linked investments and developments, we anticipate this exemplary performance will continue through 2011.

We expect the Mongolian economy to grow up to 10% in 2011 (or 33% in dollar terms due to further estimated appreciation of the tugrik against the dollar), putting it among the top three fastest growing economies. The primary growth drivers for 2011 will be the $2.3bn capital budget (over one-third of Mongolia's GDP in 2010) allocated by Ivanhoe Mines and Rio Tinto for developing the copper-gold Oyu Tolgoi deposit, strong and growing investments across the mining sector as well as other asset classes, the substantial increase in government expenditure, the positive outlook for commodity prices, rising export values driven by strong Chinese demand and growth in personal income underpinned by inflows of foreign capital, and the expansion in government social payments.

For the MSE-Top 20, Mongolia's main stock market index, we expect continued outperformance and target a conservative level of 20,000, or up 40% (up 60% in dollar terms), for year-end 2011. We expect the Mongolia Stock Exchange MSE to retain its title among the top three equity markets in 2011, if not the best, on re-rating the valuation of Mongolian stocks based on the strong economic outlook. Possible IPOs by leading Mongolian companies and the planned continued privatisation of state-owned enterprises over 2011 and beyond will further support the MSE's performance in 2011.

On January 18, the London Stock Exchange (LSE) signed an exclusive Strategic Partnership Agreement with the government to restructure and develop the MSE. In our view, this is an important milestone in the development of the Mongolian securities market with a long-term positive impact.

Our key investment themes in 2011 are local and Mongolia-focused international stocks, private equity/pre-IPO/M&A, real estate, the tugrik, and corporate and government bonds. Our top picks among local equities are Tavan Tolgoi (coking coal), Mongolia Development Resources (real estate) and APU (beverages). Mongolia Mining Corp (coking coal), Prophecy Resources (thermal coal), Petro Matad (oil) and Aspire Mining (coking coal) are our top picks among the 30-plus international and locally listed companies that are members of the Silk Road Mongolia Index.

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