Mongolia Displays New Buy Signals for Foreign Investors

Mongolia, which can be considered one of Asia’s most vulnerable frontier markets, has been through a flurry of ups and downs during the past five years.  Once praised as the world’s fastest growing economy, economic growth has recently approached recession levels amid the commodity bear market, China’s economic slowdown, and the rapid drop in FDI experienced from the delay of Oyu Tolgoi, and other mining disputes.   Mongolia is a strong commodity export economy, and approximately 90% of these exports go to China, making it most vulnerable to the current commodity bear market and China’s economic slowdown.  Furthermore, its economic performance has been hindered by the unpredictable actions of the government, which has been another strong factor for driving away FDI.  The current economic landscape necessitates a shift in this previous anti-FDI attitude to avoid a recession, and notable improvements have already taken place this year, which will help improve Mongolia’s reputation for foreign investment.  Mongolia is heading in the right direction, based on events that have taken place in recent months, and now is a strong time to consider stocks that are in a bottoming out phase.

Recession Averted/Potential for 2nd Boom in 2020

Mongolia’s Annual GDP Growth expanded by 3.1% during the 1st quarter of 2016, quite a feat for this struggling economy.  There are currently no short term catalysts for growth for the country, when considering commodities and China’s future economic outlook, and lower growth projections are now being made for this year.  The World Bank has projected 0.8% growth for this year, and the IMF has projected 0.4% growth this year.  Optimism for Mongolia’s economic turnaround is not misplaced, but does certainly require one to take a futuristic view.  The main catalysts for Mongolia’s economy will not fully come into play until 2020-2021, when its Oyu Tolgoi Mine goes into production.  Rio Tinto, with its partners the Mongolian government and Turquoise Hill Resources, have approved the next phase of developing Oyu Tolgoi Copper and Gold Mine, which is a strong point of reconciliation for the country.  The development of this mine will begin in mid 2016, and first production is projected to take place in 2020.  This project is projected to contribute to 1/3 of the country’s GDP, and its implementation is a breath of fresh air for the country and foreign investors, as the previous three year delay has reduced investors’ confidence in Mongolia.  An important lesson from 2012 and 2013 is that it is not worthwhile to buy into Mongolia when growth is strong, as history has proven that Mongolia’s economic growth has not been stable.  Instead, I think the most worthwhile investment approach is to invest during dark times, when stocks have bottomed out, and to sell sometime after Oyu Tolgoi goes into full production in the 2020s.

Resolution of Disputes with Foreign Investors: Buy Signal

The government previously had a 7 year dispute with Khan Resources, a uranium miner in Mongolia, but has agreed to pay $70 million to this Toronto listed company.  The Mongolian government met with this company at a Canadian Mining Conference in Toronto, and resolved to pay this amount to the company to improve its image with foreign investors.  Khan Resources’ stock has responded very well to this new announcement, nearly doubling from its price in early March.

The resolution of this dispute can certainly be considered a macroeconomic boost for Mongolia’s economy, and a sign that the government is beginning to recognize the necessity of improving its image for investment.  FDI is a necessity at this point, and this resolution was perfectly timed, as it was coupled with the beginning of the Oyu Tolgoi Mining Project.

Another significant resolution to note occurred during early 2015, when Kincora Copper resolved a dispute with the Mongolian government, which was delaying its exploration efforts, and caused nearly $7 million impairment for its balance sheet.  This reconciliation creates a strong investment case for this company, which is active in Oyu Tolgoi, and recently announced a new merger on May the 25th.  This merger will allow it to utilize HPX’s typhoon technology, which is instrumental in the discovery and delineation of high grade orebodies present at Oyu Tolgoi.  Like several stocks active in this country, Kincora Copper’s stock price trades at a far cry from the levels of 2012 and 2013.

Positive Movement for Other Stocks

Since early March, a large number of stocks have delivered strong returns.

  • Xanadu Mine’s stock price increased from 0.10 on March the 1st, to its current price of 0.21.
  • Erdene Resource Development’s stock price increased from 0.17 on March the 1st, to its current price of 0.33.
  • Khan Resource’s stock price has increased from 0.44 to 0.86.

I previously mentioned these three companies in a Mongolia Investors’ Confidence Report, and all three of these companies have experienced positive stock price movement since March the 8th:

  • Mongolia Growth Group’s stock price has only increased by 2.6%.
  • Mongolian Mining Corporation’s stock price increased from 0.07 to 0.10.
  • Kincora Copper’s stock price increased from 0.02 to 0.04.

The positive movement for stocks in recent months displays all of these stocks’ correlation to economic and political events in Mongolia, thus solidifying the value of a top down investment approach for a diverse portfolio of stocks with significant operations in Mongolia.  An improved economic environment for Mongolia in the 2020’s would produce wonders for a large number of stocks, as the sell off has been strongly based on negative sentiment for Mongolia.  Events in recent months display that improvements are taking place in Mongolia, marking now as a strategic entry point for investors.

Mongolia is Analogous to Chile

The South Gobi is a relatively unexplored area compared to other copper belts, as it currently has had less than 6 years of foreign exploration.  Mongolia can be considered a virgin territory, relative to other strong copper producing countries such as Chile and Peru.  The untapped nature of Mongolia’s copper belts in the South Gobi is very similar to Chile in the 1970’s, making investment in this area a strong, futuristic trend to tap into.  Chile had very limited exploration during the 1970’s, but now operates approximately 100 exploration projects.   Kincora Copper is one of several stocks located in this strategic area of Mongolia, which is expected to be the world’s third largest copper mine, and is also joined by companies such as Xanadu Mines and Entree Gold.  This is a wonderful futuristic trend to buy into, for investors who have a time horizon of more than five years, as stock prices returning to 2012-2013 levels would produce bar none returns for investors who chose to invest now.

Buy During the Gloom, Sell During the Boom

The previous 2 year dispute over Oyu Tolgoi resulted in FDI collapsing from $4.4 billion to $0.5 billion between 2012-2014.  The country’s annual GDP growth consequently collapsed from its peak of over 15% in 2012, to its current level of 3.1%.  The approval of phase 2 of Oyu Tolgoi, which will start in mid 2016, can certainly serve as a catalyst for Mongolia’s 2nd economic boom, which should take place in 2020-2021.  The implication for stock returns that would occur amid a 2nd economic boom in Mongolia is very powerful for a large number of stocks with significant operations in Mongolia, and most specifically in Oyu Tolgoi.  Oyu Tolgoi is moving forward as planned, and the resolution of the government’s long dispute with Khan Resources has also resulted in a necessary improvement for Mongolia’s previous notorious anti-FDI attitude.  Stocks are following with positive movements due to these catalysts, and many still trade at far cries from the higher levels experienced during Mongolia’s economic peak.  Mongolia is appealing for very few investors, after the rapid declines experienced since 2012, which has left many investors rightfully cynical.  Mongolia does present a high level of risk for investors, yet the current situation presents strong opportunity due to the perceived risk being much higher than the actual risk.  Moreover, the untapped Oyu Tolgoi has the potential to be a very salient area for mining in the future once operational, and investing before stocks potentially boom provides the opportunity for bar none returns.

Those willing to give the country a 2nd chance, amid new political and economic improvements that will come into full fruition in 2020, have the potential for strong returns.  I retain my conviction for Mongolia as a small/high risk portion of a frontier market portfolio, and furthermore encourage investors to buy during dark times for the strongest upside.  The 2nd boom that will be driven by Oyu Tolgoi in the 2020’s is the opportune time to sell, not buy.  Significant improvements made in recent months further edify my conviction for the contrarian opportunity that Mongolia offers investors.

Sri Lanka is Intriguing: Areas to Consider for Value Investing

Opportunity Overview

The stock market discount and comparatively stronger trends of growth present in frontier Asia is intriguing, and a buy frontier, sell emerging approach is one of the most clear cut ways to prosper when investing in Asia. These trends, coupled with noteworthy political improvements, can be combined to create a strong value investing case. Sri Lanka is a strong frontier market in Asia that meets all of these requirements, yet is being relegated by many foreign investors. Sri Lanka has been benefiting from the end of the country’s 26 year civil war that ended in 2009, which has resulted in an improved political landscape.   This improvement has been coupled with Sri Lanka’s new government, which was elected in January 2015.

On top of this, the country has been experiencing rapid growth in consumption, and has some interesting investment opportunities found in areas such as banking, healthcare, tea exporting companies, construction, manufacturing, logistics, and consumer goods. The country of 21 million has comparatively lower wages, and a literacy rate of 92%, the highest in South Asia, and among the highest in Asia. However, the most salient, and overlooked opportunity, is the country’s strategic geographical placement on the Indian Ocean, allowing it to be strong economic center for logistics. This strategic benefit, will be modestly complemented by other strong trends, and allow Sri Lanka to eventually emerge as a salient asian market in the future.

Relegation of Sri Lanka’s Geographical Benefits

Sri Lanka is strategically located on the Indian Ocean, a few miles away from the East-West shipping port, where it is estimated that 60,000 ships pass each year, carrying 2/3 of the world’s oil and half of all container shipments. The country’s SAGT Terminal, is one of three terminals in Colombo Port, which handles shipments to India and other subcontinent countries. Transshipments from India account for approximately 75% of its shipments.  The other two ports are run by the government and Colombo International Container Terminals.

Sri Lanka SAGT Port

SAGT Port was ranked 4th for Global Productivity!  Source: Lanka Times

China has been spearheading investment in Sri Lanka, which has included highways, ports, and an airport in the south. China also wants to build a controversial $1.4 billion port city in Sri Lanka, and was recently given permission, after delays from this project due to protests. China has also identified the country as a key point on the maritime Silk Road, which will extend from China to Africa.

This strong attention from China has been balanced with significant FDI from India, which was reluctant after 2009 due to human rights concerns for the Tamil population in Sri Lanka, as India also has a large Tamil population in Tamil Nadu.  India seeks to be active in FDI in Sri Lanka, in order to compete with China, and to foster close relations with Sri Lanka, which is already a strong trade partner.

Stock Market

Sri Lanka Stock Market

Sri Lanka’s stock market has approximately 294 listed companies in 24 business sectors, with a market capitalization of around $18 billion. The appeal of its stock market is for a long term hold, as performance this year has not been stellar.

As with many frontier markets, it is simple to construct a portfolio with lower valuation, mainly by avoiding high valuation found in certain sections of the consumer discretionary sector, and identifying areas that have had a boom in earnings growth.  A target single digit P/E is certainly feasible for Sri Lanka.


Sri Lanka Inflation

Sri Lanka’s inflation most recently fell to 2%, a far cry from the higher levels experienced during 2012-2014.

Annual GDP Growth

sri lanka gpd growth.png

Sri Lanka’s economy is projected to grow by 5.6% annually through 2016-2020, driven strongly by tourism, tea exporting, logistics, IT, and construction. Sri Lanka’s economy already has a strong benchmark of growth, as annual GDP growth has averaged at 6.15% since 2003.

Consumer Spending

Sri Lanka Consumer Spending

Consumer Spending growth has been strong in Sri Lanka, making the appeal of value investing in this industry very strong. Tea exporting companies and distilleries are two noteworthy areas where valuation is particularly low.

Growth in the Tourism Industry

Sri Lanka’s tourism industry has much to offer, due to the end of the country’s Civil War in 2009, and tourist arrivals increased by 16% during 2015, with a notable 30% increase in tourists from India. Mark Mobius’s views on Sri Lanka’s tourism industry are very positive.

” The entire country is really a tourist haven. It has history, it has beautiful beaches, it has nice people and it’s small enough so you can see everything in a week or less”

The end of Sri Lanka’s Civil War in 2009 has served as a catalyst for the increased appeal of its tourism industry, and there is still ample room for growth ahead.

Healthcare Industry

Sri Lanka’s healthcare industry is an area for strong consideration, driven by the following advantages:

  • 9% of its population is currently over 65 years old, and this amount is likely to double by 2030 according to a rating by Fitch
  • Private Hospitals have achieved 21% CAGR in the past four years, compared to the public sector’s growth of 10%
  • 70% of the country’s population uses private hospitals
  • Health expenditure per capita in Sri Lanka is only $127, significantly lagging behind much of emerging Asia.

This area provides strong opportunity for growth in the future, and several listed private hospitals are available at reasonable valuation.

Industrial Production/Manufacturing

sri lanka industrial production

Sri Lanka’s industrial production has risen substantially, and the country’s manufacturing industry presents strong opportunities. Sri Lanka is poised to benefit more if it can join trade agreements, and bring in more FDI, as FDI currently only accounts for 2% of its GDP. Employment in the manufacturing sector is comparatively attractive, as workers can earn substantially more than working in the agriculture sector.  One particularly strong, high growth area is for tile manufacturers, as several stocks in this area have surged in earnings growth, and trade at very low valuation.

Banking Industry

The opportunity in Sri Lanka’s banking industry is also worth noting, as several listed banks traded at a strong discount to the CSE Index. NPLs historically averaged near 4.5% since 2010, and declined to 4.2% as of September 2015. The main threats for the increase of NPLs in the future include slowed economic growth, rising interest rates, and banks having exposure to SOEs in their assets.  In addition to low valuation, some banks in Sri Lanka can also be positively noted for high CAR, ROE, and profit margins. Sri Lanka is also a strong outlier in frontier Asia in terms of its high banked population, as around 83% of its population is already banked, yet other Asian frontier markets such as Bangladesh, Vietnam, and Pakistan can offer more in terms of growth, due to their comparatively lower banked population.

Areas of Concern

Overall we can clearly see strong trends of economic growth, low valuation and a consequent strong appeal for Sri Lanka’s stock market, as well as improvement of previous political and economic risks. The following areas of risk should be noted, although fundamentals are certainly strong enough to create a strong case for value investing.

  • Low Liquidity: A common challenge for any frontier market.
  • Debt: Sri Lanka’s Government Debt to GDP is 75.5%, notably higher than its frontier Asian peers. Sri Lanka requested a $1.5 billion loan from the IMF, and is also planning to sell $3 billion worth of bonds in global markets this year. The yield for Sri Lanka’s bonds has soared to 11.6%!
  • Corporate Tax Rate: Sri Lanka’s corporate tax rate is 28%, well above other attractive destinations such as Vietnam, which offer further incentives beyond the existing low 20% corporate tax rate.
  • SOEs: SOEs, which account for 18% of the country’s GDP, have been criticized for poor financial performance.
  • Trade Deficit: Sri Lanka’s trade deficit has averaged at -$457 million since 2003. The country’s main exports are textiles and tea, which both account for approximately 57% of its exports.


Sri Lanka has witnessed strong recovery on the political front, and its strategic geographical location and strong trends of growth both make it a strong futuristic investment destination in Asia.

The Dow Jones is a Catalyst for Misplaced Optimism

The Curious Recovery of the Dow Jones

After delivering stellar gains after America’s economic recovery in 2008, the Dow Jones Industrial Average has stalled, with a 1 year decline of 0.19%.   A further examination of the components of the Dow Jones, and most importantly how stronger performing components have replaced some of the sub par links, reveals that its strong benchmark of success after 2008 has been a catalyst for misplaced optimism for America’s stock market. Its current mediocre performance is further troublesome, as one can holistically examine a flurry of sell offs this year  in multiple sectors, such as the energy, biotechnology, and banking sectors. The Dow Jones stands as a misleading rosy shaded picture of how America, and most specifically its stock market, has recovered and continues to prevail.  Weak fundamentals can easily be seen by examining areas of America’s economy, particularly areas the middle class is most vulnerable to, as well as the stock price losses experienced in other crucial sectors of America’s economy.  A list of 30 companies is certainly too small of a sample size to holistically represent America’s stock market, yet I think the modifications and strategic exclusion of vulnerable areas makes the impact of its distortion of reality much stronger than one would initially assume.

9 Year Gain of the Dow Jones Industrial Average

Dow Jones 10 Year.png

Source: Macrotrends

QE is a Hoax

Quantitative easing, and America’s status as having the world’s reserve currency, has been correlated to the questionable recovery of America’s economy, and Wall Street has most certainly been an unnecessarily strong beneficiary of the Fed’s QE policies.  The Fed has nearly quintupled the monetary base since 2008, a severely relegated factor of consideration for those that still stand optimistic of the Fed’s policies.   The most relevant question is, how much further can you go after you have quintupled the monetary base?

monetary base

Even Alan Greenspan recently stated that monetary policy has reached the outward bounds of its effectiveness, without another round of quantitative easing, and that another QE would result in a higher P/E for America’s stock market.  Most recently the profit of  the S&P 500  declined to 9.8% in Q1 2016, the lowest level experienced since the financial crisis.  We can certainly see a flurry of companies that are beginning to fall on earnings growth, and further positive stock price movement would be troublesome, in terms of valuation.

Other Weak Fundamentals

While America continues to deliver moderate GDP growth, and records inflation at 0.9% , the impact on the American population post 2008 has certainly been adverse, and recession like impacts can be felt throughout America.  This can serve as an initial point of skepticism as to why the Dow Jones Industrial Average has curiously risen upwards, while other economic fundamentals post 2008 have become far worse.  This is not to mention America’s military industrial complex, which drives the government further into debt, and produces economic adversity for America’s population.  Government expenditure from tax revenue is not properly spent on crucial areas that would develop America’s economy and be altruistic for its population, including areas such as healthcare, education, and R&D.

fed damage

Of the above areas, the emergence of the student loan bubble post 2008 is most questionable and disturbing.  Student loans now comprise nearly 37% of the government’s  total assets.  The struggle of America’s population is labeled as an asset of the government, and a whopping portion of it.

Strategically Replacing Components: Skepticism is Befitting

Wall Street can be prosperous, while America’s middle class struggles.  This is by no means a new phenomenon, and is merely my starting point for skepticism.  What is most curious to note, is that Wall Street can begin to fail to be prosperous in multiple areas, yet produce the illusion of prosperity or neutrality, which can be seen in an in depth examination of the Dow Jones Industrial Average.

Wim Grommen’s article from 2014 entitled “The Dow Jones is Hoax” outlines one relevant concern with the Dow Jones Industrial Average, namely the replacing of weaker components with stronger stock picks.  The Dow Jones has made some very strategic modifications to its components in recent years, which can easily be classified as cherry picking to produce the illusion of greater success.  This modification of an existing small sample size is quite troublesome.

The Decline of Alcoa and Bank of America, Which are Now Excluded Components

During 2013, Alcoa, Bank of America, and Hewlett Packard were replaced with Goldman Sach’s, Nike, and Visa.  We can particularly see that Alcoa(AA) and Bank of America(BAC) have not recovered well since the 2008 crash, and that their exclusion from the average is misleading.

9 Year Decline of Alcoa and Bank of America

BAC and AA Decline

Source: Nasdaq

Addition of Nike and Visa, which are Positive Outliers

Meanwhile, Nike(NKE) and Visa(V) have fared very well post 2008, and the strategic addition of these stocks serves as a catalyst for misplaced optimism in the Dow Jones Industrial Average. The P/E for these two stocks in 27.6 and 28.9, well above the average for the Dow Jones Industrial Average.  The addition of these companies, coupled with the removal of Bank of America and Alcoa, unnecessarily elevated the success of the Dow Jones Industrial Average.

9 Year Gain of Nike and Visa


Nike:Visa 9 Year Gain

Source: Nasdaq

The combined addition of Nike and Visa, and the removal of Alcoa and Bank of America, distorts the reality of the Dow Jones Industrial Average.

Exclusion of America’s Greatest Thorns: Misplaced Optimism

These replacements are troublesome to note, as a modification for a small number of companies can have a strong impact on a sample size of 30 companies.  What is perhaps a greater source of skepticism for me is the exclusion of the following areas: biotechnology, oil and gas, and FANG stocks.

In addition to some of the replacements made, one can also grow skeptical by examining that the Dow Jones Industrial Average excludes crucial parts of America’s economy, which have been most salient in ongoing political discourse.  Beyond looked at fundamentals, one must take a behavioral economics approach on stock market price movement, and acknowledge that political sentiment is one of the greatest catalyst for herding.

Biotechnology companies have experienced a strong sell off amid recent political debates, and even Janet Yellen has been willing to criticize the biotechnology industry for price gouging and poor fundamentals. On top of this, banking profits have dropped to disappointing lows this quarter, and there have also been strong sell offs in the energy sector amid the declining price of oil. Yet these significant components of America’s stock market are not fully reflected in the Dow Jones, which further produces misplaced optimism.

Biotech: Bubble has been Popped from Political Sentiment

Nasdaq Biotech(BIB) has consequently taken quite a fall this year, and quite strangely, there are none of these components included in the Dow Jones Industrial Average.  Biotechnology has been one of the major sectors discussed in political debates, receiving criticism from multiple presidential candidates.

1 Year Decline of Nasdaq Biotechnology(BIB)

Nasdaq Biotech

Source: Nasdaq

Political sentiment finally drove the market to become rational, as seen by the strong sell off in the sector this year.

The Dow Jones Only Includes Pharmaceutical Manufacturers, Cleverly Evading this Thorn

The Dow Jones does include two pharmaceutical companies, Pfizer and Merck, which have had stable stock price movements amid the recent industry sell off.  Therefore, the Dow Jones does not fully reflect America’s economy, as it strategically evades the issues of the  biotechnology industry, by focusing on pharmaceutical manufacturers that have had stable stock price movements.  Moreover, the valuation for these pharmaceutical companies  is 30.0 and 36.3 respectively, making a drop in price plausible, and perhaps even befitting.

9 Year Price of Pfizer and Merck

pharm. 1 year

Source: Nasdaq

Both companies have delivered impressive gains post 2008, and a key point to note is that their price has been stable in the past year, while biotechnology stocks have been strongly sold off.


The oil sector is an obvious area where massive sell offs have been experienced, yet the substantial sell off in this area is excluded from the Dow Jones Industrial Average.  A flurry of investors have suffered greatly from investments in oil companies, with the only consequence the Dow Jones faces from this is indirect, namely the adverse performance of banks due to investments in this sector.  Exxon Mobil  and Chevron’s stock prices only declined by 16% and 20% in 2015, a far cry from the sell off experienced in this industry.

2 Year Decline of the iPath S&P GSCI Crude Oil TR ETN

2 Year Decline

Source: Nasdaq

An inclusion of some major oil companies in the Dow Jones Industrial Average would easily result in a major shift in its performance, yet the average evades this major thorn with relatively negligent stock prices declines from companies in this area.

The Exclusion of FANG Stocks

The Dow Jones excludes Facebook, Amazon, Netflix, and Google, a fact which should most certainly be assessed.  Unlike other previously mentioned Dow Jones components that experienced booms, such as Nike and Visa, the collective valuation for these companies is irrationally high.  Amazon and Netflix in particular were two of four stock credited for accounting for 95% of the gain for the S&P 500 Retailing Industry Group, amid the gloomy growth of retail retail sales in America.  The P/E for both of these companies is unacceptably high, which displays further distortion of indexes.  Facebook’s valuation is also very high, and even Google trades at a premium to the Dow Jones Industrial Average.

After delivering massive gains post 2008, the collective P/E for these four companies is currently 238.7.  If these components were included in the Dow Jones Industrial Average, it would raise the P/E to approximately 50.2, a far cry from its current level.  The exclusion of FANG stocks produces the illusion that massive stock price gains in America can be coupled with reasonable valuation and earnings growth.  Amid the recent record drop in corporate earnings, investors should be cautious of positive stock price movement that is not coupled with earnings growth.

Sociocultural Angst Against Multinational Corporations

The negative political sentiment for banks and biotechnology companies has already resulted in a strong sell off in the past year.  On top of this, the recent controversy of the Panama Papers can certainly serve as an increased catalyst for heightened political disapproval for multinational corporations evading taxes through their offshore practices, although sociocultural disapproval has already been strong in the past year.  Similar to what we have seen in other industries, we could also see a strong sell off for a large number of multinational corporations if this political discontent continues, which would make the Dow Jones Industrial Average most vulnerable to a sell off.

Investment Banking Sell Off: No Free Lunch

Unfortunately, the Dow Jones is not able to cleverly evade all of America’s thorns, as seen by its exposure to the banking sector. Goldman Sachs was introduced into the Dow Jones Industrial Average in 2013, and has witnessed a strong decline in its stock price in the past year, while other components have cross subsidized with strong, and most likely unsustainable, stock price gains.

gs 1 year

Source: Nasdaq

Goldman Sachs stock price has experienced a substantial sell off in the past year, and the company’s poor financial performance this quarter can further elevate the decline of its stock price.  Its profit declined by 56% this quarter, and other banks have recorded strong losses as well.  This poor news comes at most unfavorable timing, as many companies in this sector have already witnessed a strong sell off, and the sector is highly vulnerable to political criticism.  Poor financial performance, coupled with increased political discontent with the reckless behavior of investment banking, can all serve as catalysts for a continued sell off in this sector.

Misplaced Optimism

The Dow Jones boom is ending, and currently standing at a neutral point, the Dow Jones still in many ways misleads Americans as to how its stock market is performing.  Strategic cherry picking has still resulted in a small loss this year.  For a true, deeper picture of America’s economy and stock market, one must dive deep into investigating individual sectors, and come up with a conclusion in this manner.  Fundamentals become increasingly important during dark times, and it is essential to look at fundamentals such as financial growth and valuation when making investment decisions, and to not be misguided by general bullish sentiment.  I see darkness down the line.

VinaCapital VOF Updates: Migration to the Main Board of the London Stock Exchange Was a Success

VinaCapital’s VOF, the largest and most liquid closed end fund in its peer group, has successfully completed its migration from London’s AIM to the main board of the London Stock Exchange.  I think this fund is a most appropriate stepping stone for funds wishing to gain exposure to Vietnam, without investing directly on Vietnam’s stock exchange.

More Details: VOF

The Curious Case of Iran’s Stock Market


The recent removal of sanctions against Iran will prove to serve as a major economic catalyst for Iran, and investors should begin to start noting the opportunities of Iran’s stock market and economy.  Iran is by no means a small contributor to the global economy, and apart from the country’s ability to thrive amid low oil prices, it is also a key global contributor in the following areas:

  • World’s 4th largest cement producer
  • World’s 18th largest automaker, and one of the largest automakers in Asia
  • World’s 14th largest steel producer

The Institute of International Finance projected that the removal of sanctions would result in 6% GDP growth, and Iran previously delivered 1.4% growth amid the burden of sanctions.  On top of this, Iran’s stock market rallied strongly after the removal of sanctions in January.

Stock Market Overview

Iran’s stock market is on par with other frontier markets in many ways, and trades at a strong discount to other frontier markets:

  • Iran’s stock market has over 600 listed companies, with a total market capitalization of approximately $140 billion.  It is the 5th largest stock market in the Middle East, and easily on par with other frontier markets.
  • The average P/E for its stock market is 5.6, and it offers an average dividend yield of 12.6%.
  • The stock exchange consists of a large number of companies in diversified industries outside of oil production.
  • Index futures and options may be launched in a year, which will include the ability for investors to short stocks.
  • Trading is carried out on Saturday-Wednesday from 9 a.m to 12:30 p.m.
  • There are also a large number of mutual funds and an index linked ETF, for investors wishing to utilize a fund of fund approach.


Despite the removal of sanctions, a large number of barriers still exist for investors, primarily for US investors.

  • Only Non US investors can invest in Iran directly.
  • Banks are not connected to SWIFT, presenting difficulties for transferring money out of the country.
  • Foreigners can not buy shares of all companies.  Sanctions remain in place for around 200 businesses and individuals, some of which are connected to listed equity.

Industry Approach

I filtered through certain areas and found strong value investment opportunities in the oil, cement, banking, and pharmaceutical industries.

Industry Average P/E for Observed Companies
Pharmaceutical 6.4
Cement 5.3
Oil 4.2
Banks 4.3

Source: Tehran Stock Exchange

Oil Stocks: Iran’s ability to thrive in a low oil price environment certainly makes this industry worth noting, as the stocks I noted trade at an approximate 25% discount to the index.  Accounting for approximately 10% of the country’s GDP, this sector is a key driver of the economy, and Iran has already proven its ability to have a strong global impact on oil prices.

Automotive Stocks: The automotive industry is the country’s 2nd largest sector, and Iran has strong potential to serve as an automotive manufacturing hub in Asia.  However, the valuation for stocks that I observed was very high.

Cement Stocks: Iran has an approximate 1.83% global share in cement production, and exports cement to approximately 24 countries.  The stocks I observed trade at an approximate 5.4% discount to the index.

Banking Stocks: Valuation for banking stocks is low, trading at a 23.2% discount to the index, yet like many frontier markets, the issue of non performing loans needs to be reconciled.  NPLs were 13.4% as of June last year.

Pharmaceutical Stocks: Iran’s pharmaceutical industry has thrived amid previous sanctions, and this seems to be one of the most unique, high growth opportunities the country offers.  Valuation is reasonable, as 46% of the 27 companies I looked at are trading at a discount to the index.

Taking a Closer Look at Iran’s Pharmaceutical Industry

Iran’s pharmaceutical industry has ample room for domestic growth, and much to offer the world in terms of exports:

  • Iran is the largest manufacturer of generic drugs in the Middle East and Africa, and much of this region is reliant of imports.
  • Large companies such as Novartis, Sanofi, and Novo Nordisk were already active in Iran during sanctions.
  • Iran is developing its first private industrial pharmaceutical city with over $2 billion in investments, including a large number of research and development centers, a central lab, chemical and biotechnology medicine producers, and distribution facilities.  100 companies will be based in this center.

Iran produces 90% of its medicine, and the Ministry of Health is targeting full self sufficiency in the future.

Peace and Mutual Prosperity

I am pleased that these sanctions have been removed, and have hopes that the opening of Iran’s market will prove to be prosperous for the country and those who choose to invest in Iran in the future.  Iran offers bar none value to frontier market investors, and this new development should certainly be noted for the future as a strong catalyst for Iran’s economy, and a unique opportunity for funds investing in frontier Asia. For the time being, the most rational solution would be observing locally managed funds in Iran to invest in.



Vietnam as a Global Financial Safe Haven

Investing Can Partially Replace Banking

Investing may no longer be exclusively for the most affluent population and investment bankers, but rather for individuals wishing to revolt against FX losses, and even negative interest rates that are present when utilizing the services of banks in some countries.  At its current state, the banking system in many ways fails its customers, and will eventually encourage them to seek superior alternatives.  The flurry of global FX losses found should be considered a high risk for those banking, similar to a failed investment, and investment in frontier and emerging Asia should be viewed as less riskier alternative.  

Sentiment for banks has certainly become darker this year, as seen by the strong sell for a large number of banks:

  • A large number of banks have been experiencing strong sell offs, most particularly during the beginning of this year.
  • To top this off, the trend of negative interest rates is emerging, providing lower incentive for customers to deposit money at a bank  This trend, coupled with the rapid depreciation of global currencies, makes it befitting for other options to be explored to mitigate the potential of financial loss.

Norway is a clear example of how investment can serve as a means to mitigate the risk of economic uncertainty through investing and diversification.  Norway’s $840 billion sovereign wealth fund is a wonderful solution towards creating financial security for its people, with 18% of its assets invested in Asia and Oceania.  A massive applause for Norway for taking this initiative, which displays that governments are capable of performing righteous actions(on par with Iceland jailing its bankers, while other countries have bailed them out with taxpayer’s money).  However, we can not rely on the government and banks to perform heroic and intelligent actions in our interests, and in fact can even quite reasonably state that both of these institutions should most often not even be trusted.

The industry norm is that investment bankers can lose substantial amounts investing, and still receive bonuses and government bailouts.  There is no strong incentive to deliver value, a dangerous state for such a leveraged industry.  For insight into how reckless investment banks can be, consider this example: Goldman Sach’s lost 98% of Libya’s sovereign wealth fund in 2008, through a series of unintelligent investments.  This is a complete opposite reflection of how those operating in the real world of business must behave, and a reason to be disgusted with the reckless behavior of investment banking.  It is quite reasonable to conclude that banks are reckless, not to be trusted, and financial liberty must be taken into our own hands.  

The futuristic trend of investing in Asia, into smaller, actively managed funds that have strong incentive to deliver to investors, must emerge as a means for people to safeguard their assets, and to mitigate the risk of financial loss by simply depositing money in a bank account.  Investing should emerge as a norm and necessity for the global population to avoid unnecessary losses, and the right due diligence can make one’s assets safer than cash.

Individuals Accept Unnecessary Losses When Banking

Countries that are experiencing massive FX losses should help their customers by providing higher interest rates, yet this is often not the norm.  Customers  depositing money at banks are unnecessarily being penalized by high FX losses.  If a country has a poor performing currency, a simple and rational solution is for banks is to provide higher interest rates for its customers.  For example, the Mongolian tugrik has historically been a very poor performing currency, yet Golomt Bank now offers 14.4% interest if you open a tugrik based savings account.    Euro Dollar Exchange Rate - EUR/USD The euro dropped to a 10 year low last year, representing a major thorn for those who have been holding a Euro based savings account. 

Is it reasonable to hold the euro in a savings account at negative interest, and to also be skeptical of Asia being a high risk investment destination?  The euro is one of many cases of currencies depreciating substantially against the USD, and the addition of negative interest further amplifies the loss.

Negative interest rates continue to emerge, as a desperate attempt for academics to attempt to restore slowing economies, while many frontier and emerging markets deliver strong economic growth.  Hungary recently became the world’s sixth monetary authority to introduce negative interest rates, and is currently joined by Sweden, Denmark, Switzerland, Japan, and the Eurozone.  The new trend of negative interest rates for poor performing currencies makes skepticism befitting, and increases the appeal of investing in high growth opportunities in frontier and emerging Asia.

Vietnam as a Safe Haven

For too long the world has centered its attention on the Federal Reserve,and viewed the USD as the appropriate benchmark, and a safe haven.  Frontier and emerging markets are relegated based on a general irrational sell off, while little attention is given to cherry picking through these areas to find the brightest spots.  Frontier and Emerging Markets should be considered true safe havens.

Among all frontier and emerging markets, Vietnam stands out as a positive outlier as a high growth economy, that is poised for even greater growth through 2025; Eurasia Group projects GDP growth will reach 11% by 2025.  Moreover, Vietnam’s stock market outperformed ASEAN stock market by 24% and the MSCI frontier market index by 17% during 2015, yet still has impressively low valuation.

Investment in Vietnam can serve as a safe haven for the world, amid the large number of economic slowdowns/depreciating currencies, and negative interest rates that are continuing to emerge.  Investment in Vietnam should serve as a way for individuals to safeguard a portion of their assets, in addition to other traditional forms of investment, such as physical gold, bonds, and real estate.  Diversification is the key amid the economic certainty that is ahead.  

Stock Market Discount: The P/E for Vietnam’s stock market is 11.7, and the average dividend yield is 3.9%.  This strong discount to emerging Asia offers 30-40% upside simply based on Vietnam eventually transitioning to an emerging market, and can be considered a conservative trait amid the decreasing investors’ confidence for frontier and emerging markets.  Targeting SMEs in Vietnam provides the opportunity for investors to invest at even lower valuation, and to have substantially higher dividend yields(9-10% is not abnormal).

FDI Shift: Companies such as Samsung, Microsoft, and Intel have shifted manufacturing from China to Vietnam for comparatively lower wages.  This is old news.  In recent news, Apple announced its plan to invest $1 billion to build a new data centre in Hanoi.  A flurry of companies from China, Hong Kong, Taiwan, Japan, and South Korea are pouring money into Vietnam, to capture the trend of high opportunity that Vietnam offers as a low cost manufacturing destination.

Favorable Macroeconomic Trends: Trends of high growth are present throughout Vietnam; the country’s annual GDP growth was 7.01% during the 4th quarter of 2015, and retail sales have averaged at 21.56% since 2002.

Improvements: Banks in Vietnam have drastically improved NPLs, with the majority of banks having NPLs under 3%, and inflation has declined to 1.26%.

High Growth Industries: There are a large number of high growth industries which present strong opportunities for value investing, including the following industries: manufacturing(plastic, automotive, pharmaceutical, textile), real estate and construction, consumer staples, and financial services.

FX Risk Offset: Vietnam’s currency has been relatively resilient, only depreciating 5% during 2015, and the potential for strong capital gains and the 3.9% average dividend yield provides justification for this slight risk.  China’s devaluation last August caused an FX nightmare in Asia, and future Fed rate hikes worsened this scenario.  The resilience of Vietnam’s currency during these times has been impressive.

Large Presence of Funds: Vietnam is no contrarian destination for the asian hedge fund industry, and there are even a large number of Europe based funds that focus on Vietnam’s upside potential. There are a large number of unlisted closed end and open end funds that investors can take advantage of, as well as funds trading on the London and Irish Stock Exchanges.   Rather than depositing money at a bank, potentially at negative interest, serious consideration should be given to Vietnam, as a means to safeguard one’s assets.  

Investors should highly consider smaller, actively managed funds, that have a superior understanding of Vietnam’s economy, and chose to invest in Vietnam for the specific, futuristic opportunity they envisioned.  In this manner, investors can ensure that they access funds with superior insight into how to access Vietnam’s growth.  A simple assessment of historical performance is an excellent way to filter through these funds to find the best value, and to find successful value investors.





Mongolia Investors’ Confidence Report

A report on the long term recovery of Mongolia’s economy, catalyzed by the recent finalization of the Oyu Tolgoi Mining project, which is expected to contribute to 1/3 of the country’s GDP once in full production.  This report also mentions stocks in Mongolia that are in a bottoming out phase, including Mongolia Growth Group, Mongolian Mining Corporation, and Kincora Copper.


Mongolia is best suited for investors who have a time horizon of five years or longer.