Stock Market

We believe that the Mongolian Stock market and local currency assets in the fastest growing economy in the world are the “hidden jewels” of frontier market investing.

The stock market in Mongolia was established in 1991 when the collapse of the Soviet Union compelled Mongolia to switch from a communist to a capitalist economy and democracy. Mongolia decided to privatize state assets through the creation of a stock market.

Since then the local capital market has developed and today is again at a major turning point as the country becomes the fastest growing economy in the world.

MSE (Mongolia Stock Exchange) has been best performing stock market in the world in 2010 with growth of over 130% and despite recent pull back Mongolia still managed to be the second best performing stock market in the world in 2011 with 47% return. Far sighted investors realize that in world with too much debt and structurally weak Western economies, investment in recourse rich economies is one the best macro trades.

We expect that the MSE will continue its multi-year secular bull market trend, as market liquidity improves and more and more Mongolian companies seek IPOs on the local market we will see a re-rating.

The MSE will likely see consistent success in coming years. The Mongolian stock market might not offer the best emerging market returns every year as it did in 2010, but investors worldwide have taken notice of the compelling long-term investment story.

We expect market cap and daily equity average turnover consistently and substantially increase in 2012, however gradually. The strategic partnership between the MSE and the LSE (London Stock Exchange) Group to modernize the MSE and bring world class standards by introducing a state of the art trading system to the local market is revolutionizing the local capital market. The LSE has a three-year contract to actively manage the MSE.

The Mongolia FRC (Financial Regulatory Commission) is working on introducing new securities laws as well as investment fund law.

We believe that the downside risk in the Mongolia equity is limited as true profitability of Mongolian companies is still understated and the economy expands at rapid pace. The balance sheet assets of many locally listed Mongolian companies are still undervalued or asset book values much lower than the market value or replacement costs.

We expect an additional number of new share offerings and IPOs in 2012 as the Mongolian government is privatizing SOE (State Owned Enterprises) in mining, mineral processing, power generation and distribution, construction materials, telecom and transportation.