In a cafe inside the Chinggis Khaan Museum, we sat down with Javkhlan Ivanov, the COO of the Mongolian Stock Exchange (MSE), and Tulga Enkhtaivan, CEO of InvesCore Asset Management, to learn about the state of the MSE. We discussed the growth of the exchange, tips for foreign investors, the many exciting initiatives launching in the coming months, and of course travel tips too.
For background, the Mongolian Stock Exchange was founded in 1991 to privatize state-owned assets after the fall of communism. In 1992, state-owned factories became joint-stock companies and shares were sold to citizens. As a result, 52% of the population became shareholders. Since founding, the exchange has had multiple meteoric years including 2010 and 2021 when it was crowned the world’s best performing stock market (...though don’t get too excited… liquidity is still a major concern).
The MSE has grown from the “world’s smallest exchange by market cap” in 2006 to a market cap of ~$3.3bn today (as of 7/12/24). Since 2020, the market cap has increased three fold in large part due to the listing of five of Mongolia’s largest financial institutions. The MSE has 186 listed companies and 20 bonds and was recently added to the FTSE Russell’s Frontier market classification. The exchange has been increasing product offerings including the addition of the Mongolian Mineral Exchange to support the trade of coal, copper concentrate, and other minerals. Trading volume on the Mineral Exchange has been significant with ten million tons of coal traded on the exchange in 1H 2024 alone.
See below for our discussion.
What makes the Mongolian Stock Exchange attractive for foreign investors?
For starters, the capital gains tax breaks. Through the end of 2026 the capital gains tax is 2% and from 2027-2029 it will be 10%. It will revert to 20% after 2029. The prior tax rate was 20% on a gross basis.
There is a view that stocks are undervalued, especially considering the growth profile of the country. This is notably true for commercial banks which have a P/B of 0.8 or 0.9.
Mispricing is prevalent. For example, many companies are profitable and will announce positive earnings, but no share price movement follows. Mispricing happens because of a lack of institutional investors – there are only 3-4 domestic asset management companies and foreigners have a relatively small presence.
There is no discrimination between foreign and local investors, no currency movement restriction, no prohibition on foreign individuals and companies for capital repatriation, etc.
What are you excited about for the rest of 2024 and beyond for the Mongolian Stock Exchange?
Next month, the government is expected to issue treasury bonds for the first time since 2017.
In September 2023, the FTSE added Mongolia to the "Frontier Market” classification. The addition of Mongolian stocks to this index is expected to drive foreign interest in the MSE. No stocks have been added to the index yet, but they are expected to be added in the future.
There are also a number of state-owned enterprises expected to IPO in the coming years.
What is your advice to foreigners for getting started investing on the Mongolian Stock Exchange?
For news, subscribe to Capital Markets Mongolia and Inside Mongolia by Lemon Press. These are great English resources. Several commercial banks involved in capital markets send updates and publish macro outlooks in English as well.
For institutional investors, there are three custodian banks.
For retail investors, there are 50 brokers, half with mobile apps making investing easier than ever. For example, you can search for InvesCore Capital’s mobile app on either Google or App store to trade Mongolian stocks.
Please describe the foreign investor base
During 2020-2022, foreign investors represented ~15% of the investor base with 55% of the foreign investor base from South Korea, 8.9% from the U.S.A., 5.6% from Japan, 2.8% from Germany, 2.8% from Hong Kong, 2.8% from the Great Britain, and the remainder from the rest of the world. Over the years, the foreign investor base has included: Baring Private Equity Asia, Sequoia Capital China Advisors, Value Partners, and more.
Highlight an example of a successful company on the exchange.
The Mongolian Stock Exchange itself is a great example. In December 2022, the MSE became a public company when it sold 34% of its shares. Since the IPO, the share price has tripled.
In 2021, the MSE Top 20 Index was up by 130%, prompting Bloomberg to crown it the World’s Best Performing Market of 2021.
Recent listings are below:
What do you think are the biggest barriers to entry for foreign investors?
Lack of information is the biggest issue. There are initiatives to change this including international events in NYC, Shanghai, and Hong Kong. Additionally, the MSE is working on expanding market news in English. Currently, only the biggest companies report in English. There is a push to get all Tier One companies to report in English.
Operational risk reduction is another point of focus to assuage foreign investors’ concerns over entering the market. In 2011 - 2012 (the previous commodity boom period), foreign institutional investors showed great interest in the MSE, however, at that time the infrastructure of the exchange was not in place. Over the course of the previous decade, investment in the exchange’s infrastructure was made - reducing operational risk for investors to trade on the MSE.
In markets like Mongolia, liquidity is always a concern. What do you have to say to calm investors’ fears about liquidity on the Mongolian Stock Exchange?
There are improving incentives for investors and investment funds which should attract interest and help improve liquidity. For example, investment funds in Mongolia have a 0% corporate income tax to encourage investments through investment funds.
Mongolia is working to introduce market makers to the country.
Liquidity of corporate bonds is quite good.
Short selling has been allowed through a recent securities law amendment.
Multiple factors are at play to encourage domestic retail investors to participate in trading on the exchange. For example, shares of state-owned Erdenes Tavantolgoi, Mongolia’s largest coal exporter, were distributed to every Mongolian citizen born before 2012. This requires 2.5 million Mongolians (~75% of the population) to hold a securities account in the country. The recent IPOs of Mongolia’s 5 systemically important banks drummed up additional interest in the MSE from their commercial customers. Finally, Mongolia’s advanced fintech sector has reduced barriers to entry for trading.
More than 90% of MSE’s turnover is related to mining.
In 2023, Mongolia started conducting coal export trade via auctions on the Mongolian Stock Exchange. Could you please tell us more about this?
In 2023, the Mongolian Mineral Exchange became operational. The exchange supports the trade of coal, copper concentrate, iron ore, and fluorspar. The exchange currently only supports spot and forward trading, however, work is being done to launch futures and options trading too.
The exchange has 9 sellers and 260+ buyers. The buyers are mostly Chinese. There is increasing interest from Western buyers due to copper.
Shifting gears a little bit, we would love to hear about your favorite places to visit in Mongolia. Where do you recommend our readers go when they visit this vast country?
Chinggis Khaan’s birthplace, located in the Khentii Mountains in northeast Mongolia, is fantastic.
Uvurkhangai Province is also great. There is incredible history located there including Kharkhorin, the former seat of the Mongol Empire, and several impressive Buddhist monasteries. Orkhon Valley, a spectacular region to ride horses and see traditional nomadic life, is also in the province.
Khovsgol Lake and the Altai Mountains, which is where the eagle hunters reside, are also must-sees.
*(We visited Orkhon Valley and Khovsgol Lake and LOVED both!)
Please note that the interview above includes opinions and views of individuals and does not represent the broader stances of the Mongolian Stock Exchange.
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