B. Bold: “The year 2011 will see the largest investment ever made on Mongolia’s capital market

We have interviewed Mr. M.Bold, CEO of Newcom Group, which employs more than 2.000 workers. Newcom Group is the largest investor in Mobicom Corporation, 100% owner of Eznis Airways LLC, a leader in domestic flight market, and founder of Clean Energy LLC that will build the first wind park in Mongolia.

The Newcom Group’s Chief Executive Officer Mr. Bold is considered to be an expert in capital and financial markets with extensive work experiences as he worked for JP Morgan Investment Bank, which ranks second in the USA in market capitalization, for 10 years. He was recently selected as Chairman of Mongolian Stock Exchange. Our magazine will collaborate with Mr. Bold on series of interviews and writing articles in order to promote awareness among our readers regarding stock exchange, capital and financial markets, and to contribute to the development of the capital market in Mongolia. In our first issue we have interviewed Mr. Bold on the state of the Mongolian Stock Exchange, its changes and the participants of the capital market (please note that the interview was taken in February 2011).


-What is the level of development of the capital market in Mongolia, and what type of obstacles does it face? 

-It is erroneous to assume that stock market management or foreign investment are the main reason for the capital market’s underdevelopment. Examples of other countries, where capital market has effectively developed over hundreds of years, show that the participants of the capital market can be divided into five main groups. Therefore, if we try to identify, at least, some of the obstacles faced by each of these groups, then we will be able to make some concrete conclusions.
Investors represent the first group of participants. They are the key players of the capital market and can be divided into 3 types: institutional, independent, or individual investors. Institutional investors include retirement or pension funds, insurance companies, investment funds, banks, foreign funds, and hedge funds. On the Mongolian capital market, individual investors constitute the majority of participants and because their investment into the capital market is small, liquid assets are less likely to occur.  

-What is the proportion of institutional in comparison with individual investors in other foreign stock markets? What are the advantages and disadvantages of these types of investors? 

-In many foreign stock markets the percentage of individual investors is quite small, but on the Hong Kong Stock Exchange for example, 70-90 percent of assets of the capital market come from individual investors. Most large institutional investors are based in London and New York, where they participate to the capital market.
The weakness of having many individual investors is that they lead to high price fluctuations, as Their majority is interested in attaining profits from the difference in securities prices in a relatively short amount of time. Unlike them, institutional investors invest for a long period of time. However, there is a downside to bringing in foreign institutional investors. When they invest or pull out their investment, there is a high level of fluctuation in the capital and foreign exchange markets. Yet, in order to develop Mongolia’s capital market, it is necessary to set up institutional investors including retirement funds, investment funds and hedge funds, and create favorable conditions for their participation to the capital market.  

-Many shares are not traded despite being registered with the MSE, choices of securities for purchase are very limited… there is a need for securities issuers to issue new securities on the capital market, is there not?

-Of  course.  It is impossible to imagine a capital market without securities issuers. Participants to this second group include the
Government, the Housing Corporations, and other large companies. Today more than 50% of securities issued on the MSE are never traded. When foreign funds wish to purchase securities in Mongolia, these securities very rarely meet their standards. In the next 5 years, we need to get at least a small percentage of securities to be issued on the MSE by well-known domestic and foreign companies such as “Southgobi Sands”, which operates in Mongolia and is recognized on foreign stock markets, as well as mining companies that operate on strategic mineral deposits to satisfy this demand.
The third group of participants includes professional organizations, the main intermediaries between the investors and the security issuers. They include broker-dealer companies, underwriter or financial organizations that handle the sales of new securities, investment banks or organizations that assess securities, categorize and conduct the evaluation of shares, and legal consulting companies. One of the most important participants is research institutions. They conduct studies on the price changes of securities and make proposals to purchase or sell the given securities. Based on their proposal, investors make the decision to invest or not.
The fourth group of participants include the main center of all this – the stock exchange itself. No capital market development can exist without a trustworthy stock exchange. Therefore, the main influencing factors for the capital market development are the improvements made to the MSE’s governance, management, structure, rules and regulations, and the means of payment which need to conform to internationally recognized standards.    
The fifth group of participants includes regulatory organizations monitoring the fair competition on the capital market and its conformity with laws and legislation. In Mongolia, these organizations include the Financial Regulatory Committee and the MSE Monitoring Authority. These organizations bear a variety of responsibilities such as ensuring the openness of relevant information to the public, demanding the security issuers and other organizations to keep these data accessible for the public, and raising the level of trust in the market by detecting incompliancy on a timely basis through thorough monitoring mechanisms. However, depending on the internal capacity, resources, and an uncertain legal environment, sufficient conditions for fully executing these duties have not been established yet.

-What type of government support is required to conduct such comprehensive changes towards the development of a capital market?

-It is understandable that in order to resolve these issues and overcome these obstacles, full government support is necessary. In 2010 the Government of Mongolia has paid a great attention to the development of its capital market and initiated many activities. A working group established by decree of the Prime Minister has accomplished a lot to date. First of all, changes were made to the Representative Managing Council to include expert and independent representatives in order to improve the MSE governance and management. As the result of actions carried out by the Government and the State Property Committee, the London Stock Exchange (LSE) team has now been selected to oversee the management of the MSE. However, it should be made clear that only management of the MSE has been transferred to a foreign stock exchange, which does not mean that the MSE underwent privatization. These are two different issues.

-Can we then make the assumption that in 2011 major changes will be made to the capital market in Mongolia? 

-The technology we use today at the MSE was first introduced in the early 1990’s. At the time, it was considered to be the best technology. However, no significant investments have been made since then. You know very well yourself how the computer technology has changed for the past twenty year’s… Which is why, in selecting a foreign management team for the MSE, we have also required that they introduce the “Millennium IT” operating system into the MSE to make it conform to international standards. This technology is considered to be the fastest of its kind in the world, and it has been introduced into the LSE and the London Metal Exchange, two global financial centers. Recently, the LSE has made an agreement to merge with the TMX Group which operates the Toronto Stock Exchange, and is now on the way of becoming the leading stock exchange in the world. So in the future, Mongolia will not face any obstacles in connecting with the London and Toronto stock exchanges.
Apart from this, we will very soon be able to purchase shares via home-based internet services. The funds for these changes will be made through a large investment in 2011 which will have for goal of reforming the capital market. In fact, this will probably be the largest investment ever made on the capital market in Mongolia for the past 20 years.

By D.Bekhbayar