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Owen Caterer

Time to Invest in Mongolia?

Posted on October 22, 2012 Facebooktwittergoogle_pluspinterestlinkedinrss

MongoliaIn a land of deserts and nomadic warriors lies a treasure-trove of riches that would surprise most.  Geologists have found enough gold, silver, copper and other valuable materials to fill Mongolia’s bank vaults for years to come.  As the old saying goes, “good things come to those who wait” and Mongolia surely waited a long time.  Up until 20 years ago, Mongolia was still a socialist state with little impact to the outside world.  Now, it is a growing market economy looking to move forward from its pedestrian roots and make a name for itself.  Like Australia, it has a wealth of copper, gold and coal deposits but unlike Australia, the mines are just recently being developed.  In Australia, the ship has already sailed but they could be at the start of something huge in Mongolia.  The Oyo Tolgoi is the largest un-developed copper/gold project in the world located 550km south of the capital, Ulaanbaatar.  This my friends, is going to spur an economic boom in Mongolia for years to come.

Why Invest?

Looking back at Russia 20 years ago you can see the Russian Stock Market (MICEX) was trading at a mere 100 points.  If you had invested then and held til today, you would be sitting on a 1,500% return, not too shabby.  For some with a little hindsight it’s an easy bet but for most of others it’s a crazy fool’s errand.  I mention Russia for a reason as they have striking similarities to modern day Mongolia.

Firstly, both are heavily commodity based economies relying on natural resources.  Both are rich in coal, copper and gold.  See this economist article for more details.

Secondly, Mongolia’s government is a bit unpredictable just like Russia’s was 15-20 years ago.  Since the fall of the Berlin wall the government has gone through some changes but is steadily improving.  In 2011 it was the fastest growing economy with a whopping 17% GDP growth.

Third and most important to me is the lack of huge investment into the markets.  Russia’s market started very small and accelerated quickly with a current market cap of nearly 800billion USD.  Mongolia is currently sitting around 1.5billion USD.

As an investor, I want to be in before the big fish get in because once the Vanguards and Barclays start pumping in billions of fresh dollars the market is going to boom and I might have missed the boat.  To summarize, the reasons to enter the market are:

  • Beginning of a commodity boom
  • Potential multiple fold return
  • Diversify Portfolio in a new and untapped market
  • To participate in one of the fastest growing economies in the world

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Risk on investing:

 Often heard on CNBC and Bloomberg reports, an investment in Mongolia could definitely qualify as “risk on”.  With all the media attention on a global slowdown and fiscal crisis, you need to know how it would affect Mongolia.  Despite the risks detailed below, the mining projects are the bread and butter of this government and I believe they will continue to move forward and solve any problems that arrive.

  • High inflation:  Around 12.7% inflation over past 5 years and 15% as of last August.
  • Difficulty/cost of enforcing contracts:  If you get into a contractual dispute, the country’s legal and judicial system may or may not help you enforce the contracts.  The systems still need some work but improvements are being made.
  • Chinese Slowdown:  The idea that China’s economy will continue to slowdown is a real possibility which could cause a drop in the price for Mongolia’s goods.


How to get in?

The Mongolian stock market’s small size and low turnover means that you can’t buy an ETF and finding a fund to buy is almost impossible, but not quite.  We have identified a fund manager with a small fund with local managers, and already something of a track record.  It’s not easy to find these types of opportunities, but that identifying opportunities, sourcing the access point and qualifying the manager is the sort of value we bring to our clients, so contact us here to find out more.


Who is this for?

I believe part of a successful investing strategy included taking smart and educated risks.  Being overly conservative and cautious will sometimes hurt your portfolio more than protect as you can miss out on opportunities and hold other positions too long.  This is for the investor that has around a $500,000 portfolio that is looking to give his annual return a spark.   While I wouldn’t suggest Mongolia for more than a 5%-10% allocation in a portfolio, it does have the potential to make a significant impact.  Overall, if you want some bang for your buck, then dig deeper into Mongolia and you may just find a gem.


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