Fears in Global Recovery and Selloff in Equities. What Does It Mean to Mongolia?
Eurasia Capital does not believe the current crisis will lead to the repeat of the 2008 crisis which severely impacted Mongolia.
Global selloff on US’s Sovereign Debt.
S&P’s downgrade of United States’ credit rating to “AA+” from risk free “AAA” has unleashed turmoil across the global financial markets which were volatile enough as it is. The markets have been concerned about the debt problems in some of the EU countries that have been putting pressure on the recovery of the global economy. To some extent the announcement made by the European Central Bank that it is ready to purchase Italian and Spanish bonds in an attempt to stop contagion of the sovereign debt crisis has been positively received by market participants. However, strong negative investors’ sentiment on the back of US credit rating downgrade by S&P has resulted in significant decline of stock markets and commodity prices for the last three days (August 8-10). All major US equities plunged, including S&P 500 Index -6.6%, DJIA-6.3% and Nasdaq Composite Index-5.9%. Asian markets – Shanghai Shenzhen CSI 300 Index, Hang Seng Index and Nikkei Index have declined 2.5%, 5.5% and 2.8%. We view the current panic selling as the crisis of confidence. Although history was made, not much fundamentally changed. S&P revealed nothing new about the US or global economy, in our view. Sovereign debt issues besieging the western economies have been lingering for quite some time. We believe reducing that debt has no immediate solution, but remains critical for long term well being of global economy.
Mongolian economy will maintain its strong growth.
Demand for commodities will continue to set pulse of Mongolian economy. Confidence crisis in the West is unlikely to have any immediate effect on Mongolia. We do not believe the current crisis will degenerate into global downturn akin to 2008, which brought fiscal shock to Mongolia. Commodity prices are to remain strong due to demand from emerging Asian economies. Copper and coal are the core export revenue generators for Mongolia. Although, international copper price has declined about 11% to US$8,570 since the beginning of August, Mongolia is well positioned to withstand any short term volatility in commodity prices. State budget price assumptions for copper and coal in the current year are US$5,983/t and US$98.8/t respectively. In 7M2011, state budget registered a surplus of MNT125.4bn, whilst accumulating MNT40.7bn in the Stabilization fund. Net international reserves in excess of US$2.1bn are over two times of 2008 level.
Mongolia-focused international equities: decline on sentiments rather than on values.
Internationally listed Mongolian equities have followed the worldwide stock market plunge mainly stirred by the news on European Union debt crisis, and aggravated by the S&P announcement. The Silk Road Mongolia Index, which tracks Mongolian local and internationally listed companies, declined 4.14% last week (August 1-5) followed by further decline of -6.4% with a cumulative loss of about US$2bn in the last three days (August 8-10). Most of the big names including Ivanhoe Mines (-14.8%), SouthGobi Resources (-12.6%), Mongolia Energy Corp. (-13.1%) and Mongolia Mining Corp (-7.4%) have suffered substantial losses last week, continued by further slump this week (-12.1%, -3.1%, -8,1% and -0.4%, respectively). We believe that this decline was driven by the immediate negative speculation rather than the existing strong fundamental values the Mongolia-focused companies are uniquely endowed with.
Local stocks: no impact on low free float and valuation.
The Mongolian domestic market did not react to events in the US, Europe or in the Middle East, being relatively flat for the last week. However, during the first three days of this week, MSE Top20, the national benchmark declined only 1.28% (or a US$63.5mn loss in market cap). Although there is no clear indication that investors in the local Mongolian equities are concerned with global markets, we expect small correction if the global markets’ rout continues. The MSE is characterized by limited number of international investors, low liquidity, and small free float. This is the main reason for low correlation of the MSE with global markets.
In our view.
The ongoing concern of global economic recession that dragged down the international commodity prices and resulted in selloff of equities globally raises a caution over the economic outlook of Mongolia and its equities in the short-term. Although Mongolia’s resource export – driven economy may be affected in the short term, we hold a positive long-term outlook. We do not believe the current crisis will lead to the repeat of 2008. Mongolian economy is to continue its breathtaking transformation. We believe that Mongolia’s equities market is in an oversold situation and selected stocks are still attractively priced.
To download full report please visit www.eurasiac.com
Eurasia Capital is a pan-regional investment bank with a focus on Mongolia and Central Asia. Headquartered in Ulaanbaatar, the Firm offers cross border M&A and advisory, capital raising, sales & trading and research services to its international and regional clients including government agencies, major energy and resource companies, sovereign wealth funds, private equity groups and global portfolio investors.
Source : Eurasia Capital Research
Global selloff on US’s Sovereign Debt.
S&P’s downgrade of United States’ credit rating to “AA+” from risk free “AAA” has unleashed turmoil across the global financial markets which were volatile enough as it is. The markets have been concerned about the debt problems in some of the EU countries that have been putting pressure on the recovery of the global economy. To some extent the announcement made by the European Central Bank that it is ready to purchase Italian and Spanish bonds in an attempt to stop contagion of the sovereign debt crisis has been positively received by market participants. However, strong negative investors’ sentiment on the back of US credit rating downgrade by S&P has resulted in significant decline of stock markets and commodity prices for the last three days (August 8-10). All major US equities plunged, including S&P 500 Index -6.6%, DJIA-6.3% and Nasdaq Composite Index-5.9%. Asian markets – Shanghai Shenzhen CSI 300 Index, Hang Seng Index and Nikkei Index have declined 2.5%, 5.5% and 2.8%. We view the current panic selling as the crisis of confidence. Although history was made, not much fundamentally changed. S&P revealed nothing new about the US or global economy, in our view. Sovereign debt issues besieging the western economies have been lingering for quite some time. We believe reducing that debt has no immediate solution, but remains critical for long term well being of global economy.
Mongolian economy will maintain its strong growth.
Demand for commodities will continue to set pulse of Mongolian economy. Confidence crisis in the West is unlikely to have any immediate effect on Mongolia. We do not believe the current crisis will degenerate into global downturn akin to 2008, which brought fiscal shock to Mongolia. Commodity prices are to remain strong due to demand from emerging Asian economies. Copper and coal are the core export revenue generators for Mongolia. Although, international copper price has declined about 11% to US$8,570 since the beginning of August, Mongolia is well positioned to withstand any short term volatility in commodity prices. State budget price assumptions for copper and coal in the current year are US$5,983/t and US$98.8/t respectively. In 7M2011, state budget registered a surplus of MNT125.4bn, whilst accumulating MNT40.7bn in the Stabilization fund. Net international reserves in excess of US$2.1bn are over two times of 2008 level.
Mongolia-focused international equities: decline on sentiments rather than on values.
Internationally listed Mongolian equities have followed the worldwide stock market plunge mainly stirred by the news on European Union debt crisis, and aggravated by the S&P announcement. The Silk Road Mongolia Index, which tracks Mongolian local and internationally listed companies, declined 4.14% last week (August 1-5) followed by further decline of -6.4% with a cumulative loss of about US$2bn in the last three days (August 8-10). Most of the big names including Ivanhoe Mines (-14.8%), SouthGobi Resources (-12.6%), Mongolia Energy Corp. (-13.1%) and Mongolia Mining Corp (-7.4%) have suffered substantial losses last week, continued by further slump this week (-12.1%, -3.1%, -8,1% and -0.4%, respectively). We believe that this decline was driven by the immediate negative speculation rather than the existing strong fundamental values the Mongolia-focused companies are uniquely endowed with.
Local stocks: no impact on low free float and valuation.
The Mongolian domestic market did not react to events in the US, Europe or in the Middle East, being relatively flat for the last week. However, during the first three days of this week, MSE Top20, the national benchmark declined only 1.28% (or a US$63.5mn loss in market cap). Although there is no clear indication that investors in the local Mongolian equities are concerned with global markets, we expect small correction if the global markets’ rout continues. The MSE is characterized by limited number of international investors, low liquidity, and small free float. This is the main reason for low correlation of the MSE with global markets.
In our view.
The ongoing concern of global economic recession that dragged down the international commodity prices and resulted in selloff of equities globally raises a caution over the economic outlook of Mongolia and its equities in the short-term. Although Mongolia’s resource export – driven economy may be affected in the short term, we hold a positive long-term outlook. We do not believe the current crisis will lead to the repeat of 2008. Mongolian economy is to continue its breathtaking transformation. We believe that Mongolia’s equities market is in an oversold situation and selected stocks are still attractively priced.
To download full report please visit www.eurasiac.com
Eurasia Capital is a pan-regional investment bank with a focus on Mongolia and Central Asia. Headquartered in Ulaanbaatar, the Firm offers cross border M&A and advisory, capital raising, sales & trading and research services to its international and regional clients including government agencies, major energy and resource companies, sovereign wealth funds, private equity groups and global portfolio investors.
Source : Eurasia Capital Research
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