The exclusive Strategic Partnership Agreement signed between the London Stock Exchange Group (LSE) and the Mongolian State Property Committee (SPC) to restructure and develop the Mongolian Stock Exchange (MSE) is an important milestone in the development of the Mongolian securities market with long term positive impact. According to the agreement, LSE will appoint a management team to oversee MSE development and privatization, and will provide trading and surveillance infrastructure. The MSE is expected to go through a comprehensive reform and upgrade as LSE plans to be involved from advisory and training on capital markets infrastructure and legislative framework, modernisation of market rules and operations to expansion of tradable asset classes (derivatives and ETFs) and introduction of "international standard Mongolian market index".
Both LSE and MSE will benefit from this partnership. Under LSE management, MSE should become an effective source of capital for Mongolia companies and widen opportunities for local and international investors with expected IPOs and increased market size. At the same time, with its expertise and technology, LSE will gain access to the resource-rich frontier market and should be able to compete effectively with large regional stock exchanges such as the Hong Kong Stock Exchange (HKEx), especially for international IPOs and dual listings of major Mongolian state-owned enterprises (SOEs), most importantly Erdenes Tavan Tolgoi. This partnership increases LSE's chances to become a strategic shareholder when the Mongolian government proceeds with the MSE privatization.
The partnership will help MSE become one of the best performing stock markets in 2011 and beyond, following its impressive performance in 2010. Such outperformance over the next several years would be based on the expectation that LSE would be able to assist in unlocking the huge potential of the Mongolia capital markets -- valuation rerating, boost in liquidity, improvement in corporate governance, stronger pipeline of IPOs and equity offerings as well as dual listings by international listed companies with operations in Mongolia. Major IPOs by the Mongolian SOEs and large private sector companies coupled with possible dual listings by Mongolia-focused international listed companies with their current USD33-billion in market capitalization may catapult MSE into one of the largest frontier markets globally in the next 4-5 years.
This partnership should accelerate the process of MSE becoming a viable source of capital for Mongolian companies and an efficient channel for wealth distribution from mineral resources among the Mongolian population. Over the longer term, LSE may assist MSE to become a regional hub for capital raising by resource companies, attracting listings from neighboring countries. We expect Mongolia to emerge firmly on the map of international investors and join the MSCI frontier market index, perhaps as early as this year. We reiterate our key recommendation for investors to gain exposure to the Mongolian local equities as Mongolia is still in the early stage of its 2010-2020 period of the world beating economic growth.
Source: Eurasia Capital
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