Mongolia – The New Asian Tiger

In Emerging Markets, General Investing, Mark by MarkLeave a Comment

Mongolia has always been a land of fierce and proud nomads.  Since pre-historic times, its people have roamed and conquered, at one time or another, most of the land between Poland in the west to Korea in the east, and from Siberia in the north to the Gulf of Oman and Vietnam in the south.

In the chaos of the late 12th century, a chieftain named Temüjin united the Mongol tribes spread between Manchuria and the Altai Mountains.  In 1206, he took the title Genghis Khan.  He went on to wage a series of brutal military campaigns that swept through much of Asia, eventually forming the Mongol Empire, the largest contiguous land empire in world history, encompassing over 20% of the planet and 100 million people.

The Mongolian Empire’s History

The Mongolian Empire
Based on its history, it seems logical that Mongolia would one day rise again.  In fact, it is positioned to be one of the fastest growing economies over the next decade.  In the first half of 2010 Mongolia’s stock exchange SOARED by over 70%!  Yes, you read that right.  According to the folks at Renaissance Capital, in their November 2009 “Mongolia – Blue Sky Opportunity” report, “The transformation will begin in 2010.  The signing of a joint venture between the Mongolian government and the Ivanhoe-Rio Tinto alliance in Oct 2009, to exploit the Oyu Tolgoi copper mine, has set a precedent for the mining industry.  The $4bn investment expected over the next nine years in this project alone is roughly equivalent to Mongolia’s entire GDP in 2009.”  And, there are several other projects with similar world-class assets, including coal, molybdenum, tin, tungsten and gold.

Foreign investment will underpin significant mining sector development.  We would expect this to spill over into the wider economy.  The country’s export volumes are expected to increase by over 400% by 2014, therefore we also expect the current account to show strong surpluses, reaching 24.9% of GDP by 2014.

There is no doubt that Mongolia is in for a sustained period of double digit real GDP growth, driven by a marked increase in foreign investment, mainly in the resource sector.   Analysts are expecting real GDP growth to come in at 9.5% in 2010, and to average 10.8% over the 2010-2014 period.

This is why we absolutely love the emerging markets.  Places like Mongolia, Bangladesh, Sri Lanka, the Philippines and Poland have all enjoyed fantastic stock market runs thus far this year.  These markets still have very low relative valuations despite the run-ups.  The average P/E ratio in Mongolia is still only 4.

The emerging markets boast cheap stocks, currencies that are holding their own and increasing in value versus the dollar and Euro, strengthening balance sheets, and increasingly free-market thinking politicians.  Contrast this to the United States, which is suffering under the weight of massive debt, slow growth, onerous and increasing regulation, tax hikes, corruption to the core and a population that is 30% (or more) underwater on their home.

Meanwhile, Mongolia is expected to grow GDP at an amazing 100% over the next ten years.  Ask yourself, where would you rather put your money?

The bottom line is that Mongolia will have become one of the fastest growing economies in the world by 2011, for reasons mentioned above.  Opportunities for investors will present themselves across asset classes and sectors, with some of the best being infrastructure, real estate, resources and banking.  Opportunities in the currency will also be ongoing.

Business Monitor International lists its key views on the Mongolian economy, which include:

  • Growth will average 9.6% between 2010 and 2014, on the back of rapidly increasing mineral exports and foreign investment;
  • Mongolia’s close proximity to resource-hungry Asian markets (particularly China) should ensure that demand for Mongolia’s exports remains elevated;
  • The political environment is stable, with a broad consensus among the main political parties towards economic liberalization, which should ensure investor confidence.

Risks to Mongolia include another slowdown in the global economy, which hit the country particularly hard the last time around.  There is also the ever-present threat of inclement weather, which has been known to hamper drilling, kill livestock and otherwise make things difficult.

However, we stick to our thesis that China, Mongolia’s biggest trading partner and next door neighbor, is an unstoppable freight train, propelled more so by increasing domestic consumption of just about everything, rather than demand for its exports. This alone should insure that Mongolia continues to grow well into the future.

An interesting contrary play might be the following: Mongolia offers pretty much everything Australia does, but has the advantages of being much closer to its main trading partner, lower wages and less political interference (nowadays).  Perhaps a short Australia, long Mongolia play would make some sense, especially given the increasingly hostile tact of the Australian government and the insanely overheated property market and ever-growing social welfare tab.

We’ll let you ponder that one, and feel free to let us know your opinions on our viewpoint.?

Live Like You Mean It,

Mark Wallace

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