Why you should care
Because in these countries, you don’t have to be a high roller to move markets.
Pick the right day and almost anyone with a few extra bucks can move the entire stock market … in Ulaanbaatar, Mongolia. Like one day this summer, when trading in the Mongolian Stock Exchange (MSE) totaled $6,943 and a single $70 investment would have raised its trading volume by a full 1 percent. “Individual investors are a big deal here,” says Nick Cousyn, chief operating officer at BDSec, the largest stock brokerage in Mongolia.
While many investors know that amid the hurly-burly, developing markets can offer great opportunities, even the boldest tend to overlook the newest exchanges — those so untested they technically can’t even be called “emerging” or even “frontier” markets by FTSE or MSCI, the world’s biggest stock market index developers. (We’ll call them on-the-cusp markets instead.) In Laos, one of Asia’s poorest nations, four companies have gone public in the past five years, the latest of which had its initial public offering in December. The tiny bourse in nearby Cambodia doubled in size last year — to include two stocks — and may soon feature a third. At the same time, MSCI says it’s considering adding stock indexes linked to more than a handful of countries few investors would otherwise even think of, including Botswana, Ghana, Jamaica, Zimbabwe, Trinidad and Tobago, Palestine and even Ukraine.
Why would anyone want to bother with itty-bitty bourses? After all, investors spooked by the oversize correction of stock markets in China and elsewhere around the world pulled $40 billion from emerging markets in the latest quarter of this year — the biggest three-month cash-out since 2008, according to the Institute of International Finance. Yet some investors still see long-term growth potential in today’s nascent stock markets. Even Marc “Dr. Doom” Faber, the renowned Swiss investor, recently said in Malaysia that he’d bet on Asian stocks despite their volatility, given how much more profitable they tend to be than shares in other countries.
Today’s on-the-cuspers are working to boost trading volumes by rolling out better tools and training for investors.
It’s easy to pooh-pooh the scant selection of stocks in some of these places, but one of the world’s oldest exchanges — inaugurated in Antwerp, Belgium, in the 1530s — reportedly didn’t offer any shares at all when it first launched, mainly dealing with promissory notes and bonds. Though small at first, it grew into a big, bustling model for other exchanges, including those in London and Amsterdam. Some markets in their early days, such as the New York Stock Exchange, also rose in prominence along with their country’s economy, helping legitimize their home base as a global financial center.
Similar hopes drive some of today’s on-the-cuspers, which are working to boost trading volumes by rolling out better tools and training for investors. (They’re open, surprisingly, to most investors around the world.) Earlier this year, the Cambodia Securities Exchange hosted an event for the public on fundamental and technical analysis, and it says it’s been collaborating with universities to offer other training sessions to help grow the country’s base of investors.
Yet there’s also doubt about whether these kinds of markets bring enough benefits to their host countries, with some decrying them as vanity projects that do little for the broader economy. Oscar Mendoza, a veteran frontier-market investor and founder of Mongolia Asset Management, says countries would be better off developing their infrastructure or strengthening their banks. “The link between a stock exchange and broader socioeconomic development is probably tenuous,” says Mendoza. “It can even be harmful.”
Look no further than the Phnom Penh Water Supply Authority, Cambodia’s first publicly traded company. Its share price rose more than 61 percent in the two days after it opened, but it has since fallen and now trades at about 18 percent below the price of its initial public offering. “All these investors are burned,” says Thomas Hugger, a veteran investor who runs the Asia Frontier Capital, a fund that invests in markets such as Vietnam, Mongolia and Iraq. (Phnom Penh didn’t respond to a request for comment.)
Indeed, high-flying buzzworthy stocks can come back to sting like a bee, and those in emerging markets are especially at risk today. The World Bank recently lowered its growth forecasts for East Asian economies, as some countries there see a strain on resources and trade, and the International Monetary Fund has warned that emerging market slowdowns are souring growth prospects for the global economy. The recent stock crash in China has also raised investor concerns about the viability of other markets with even less transparency, shorter trading track records and a lack of liquidity when someone wants to yank their cash.
But there are also some signs of change. Back in Mongolia, construction recently resumed at Oyu Tolgoi, a giant and mostly unexploited reserve of coal and other resources. It could bring about $150 million in investments every month — around $9 billion by 2023 — a big boost for a country with a $12 billion economy. The MSE jumped by about a quarter in value within a couple of weeks following the announcement, and Cousyn is closely watching its stocks. “We are in the process of taking off,” he says.