November 15, 2012 6:03 am
Emerging markets investors certainly love their acronyms. First came the Brics, courtesy of Jim O’Neil at Goldman Sachs. Rather less well-known are HSBC’s frontier market “Civets” – Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa. And barely heard of at all is the “M3 Axis”.
Rest assured this new exotic investment frontier has nothing to do with Basingstoke, Winchester or Alton. The M3 in this case was coined by Silk Road management, an Asian-based manager, and refers to Myanmar, Mozambique and Mongolia.
Clearly, the axis here isn’t a geographical one, since the three countries are in southeast Asia, southeast Africa and central Asia, respectively. But what they do have in common, according to Silk Road, is “massive, largely untapped natural resources”. They are all ex-Communist states. And all three “will be among the world’s top five fastest-growing economies in the next decade”.
Yes, really. Mongolian GDP growth is put at 15 per cent a year, with Myanmar and Mozambique expanding by 12 per cent and 10 per cent each year, according to World Bank figures.
The one that’s grabbing the headlines at the moment is Myanmar, thanks to its surprisingly rapid political transformation. It’s just been confirmed that a certain President Obama will be visiting the country fairly soon.
Not that investors are waiting for the presidential seal of approval; Australian energy independent Woodside is the latest to announce big new plans for the country’s vast natural gas reserves, and local property markets have gone berserk; a new index which tracks property prices in the key commercial city of Yangon rose by 39 per cent this year. I agree this could be a cracking frontier market, but at present there is no way in for UK investors.
By contrast, Mozambique has already attracted a huge amount of UK interest, mostly in the context of the huge offshore gas deposits in the Rovuma basin. Again, my personal view is that the former Portuguese colony is a brilliant domestic growth story, with lots of evidence that the real local consumer economy is growing far faster than the average GDP growth rate (8 per cent a year between 1993 and 2010). There are all kinds of individual companies offering degrees of exposure, mainly in the energy sphere, of which my favourite – described in more detail a few weeks ago – is Agriterra.
Mongolia has to perhaps be the hottest play, and the most risky. The local boss of the huge privately-owned commodity trading firm Trafigura recently called the country the “sleeping giant of resources that is now beginning to awaken”. There are close to two dozen multibillion dollar resource projects underway there, including the huge Oyu Tolgoi copper and gold project run by mining giant Rio Tinto (in partnership with Turquoise Hill Resources, a Canadian-listed company in which I own shares).
That huge wave of investment is having a big impact on a country that, for all its vastness and mineral riches, has a population of just 2.8m. Mongolian GDP rose 13.2 per cent in the first half of 2012 alone.
Growth at that pace brings its own challenges, of course. Inflation is soaring and the Mongolian tugrik has been very volatile. Political tension is starting to build up over how the country’s mineral riches are divided up and who is benefiting the most. Western investors have run for the hills in the last 18 months, worried by the political instability in particular, resulting in a slew of cancelled flotations.
Mongolia is indisputably risky but I’d maintain that once the Oyu Tolgoi project comes on line next year we’ll begin to see the start of Mongolia’s slow but steady ascent to mineral wealth. That will have a massive knock-on effect on local equity, consumer and real estate markets.
Much of the investment in Mongolia is coming from near neighbours, particularly China to the south. The only UK-listed player is private equity group Origo Partners, which has been a terrible investment over the past year or so – it’s fallen 60 per cent and the price now stands at a cavernous discount to the net asset value (13.625p against 35p).
Risk aversion is part of the story; the other is that Origo is heavily exposed to mining and resource projects. Investor sentiment to such companies has weakened on expectations that the world economy will grow slower in future. Origo’s key asset is a 14 per cent stake in Gobi Coal, which postponed what was supposed to be a $500m IPO. And if all this weren’t bad enough, Origo is also heavily invested in the volatile Chinese private equity market, with big stakes in companies like China Rice and China CleanTech.
In summary, absolutely terrible timing on a number of fronts. But if you think that sentiment will turn around before Origo burns down the remainder of its $25m cash pile, then the shares might be worth a look. I certainly do, because I find it hard to believe that most of the bad news isn’t already in the price.
An even more obscure way into Mongolia is offered via the appropriately named Mongolian Growth Group. This is investing in retail and land redevelopment along the main road in the capital city, Ulan Bator, and has a stake in a Mongolian insurance company. It’s run by Western venture capitalists based on Mongolia, and the shares trade on Canada’s National Stock Exchange under the amusing ticker of YAK – but they aren’t cheap at just over twice book value.