INVESTMENTS  IN  EQUITIES  AND  STOCKS  

MARKET:    RISKS,  CHALLENGES,  SUBSEQUENT  TRENDS  

                D.Gan-­‐Ochir  

doojav.ganochir@yahoo.com                      

   

Any   conclusions,   opinions   mentioned   in   this   report   express   only   the   position   of  researcher  and  will  not  banded  as  Mongol  Bank  position.    

“Foreign  investments  –  Risks  and  challenges:  Methods  of  solution”  meeting    

   

Scope  • D.Gan-­‐Ochir  2006,  ‘Influence  of  monetary  policy  to  capital  market’  research  work,  ECONOMY: Theory and practice journal, 2006-12.

• D.Gan-­‐Ochir,  B.Lkhagvajav  and  D.Batnyam  2008,  ‘Monetary  Policy  and  Bond  Market:  A  Case  of  Mongolia  ’research  work  <http://www.unescap.org/pdd/projects/bondmkt/12_Mongolia_monetary_policy_bond.pdf>.    

D.Gan-­‐Ochir  2008,  ‘Mongolian  capital  market  model  (MSMM):  Influence  of  World  financial  crisis  to  economy,  capital  market’  research  work  <http://www.eri.mn/index.php/en/l?task=view&catid=49&id=21>    

• D.Gan-Ochir 2009, ‘Capital flows and their implications for central bank policies in Mongolia’ research work <http://seacen.org/gui/pdf/publications/research_proj/2009/rp76/6-chap5.pdf>.

• D.Gan-Ochir, G.Borkhuu & D.Tsenddorj2012, ‘Financial Contagion and Volatile Capital Flows’ research work <http://www.eri.mn/index.php/en/l?task=view&catid=49&id=732>.

   

Plan    

⋅ Capital  flow  in  financial  system    

⋅ Theory  trends:  Proven  documents    

⋅ Equities  and  stock  market    

⋅  Current  situation  ⋅  Risks,  challenges  ⋅  Subsequent  trends    

⋅ Issues  to  be  considered  at  equities  and  stock  market  development  

Financial  system:  Capital  flow  

   Source:  Mishkin,  FS  &  Eakins,  SG,  Financial  Markets  and  Institutions,  7th  edition,    Pearson  Education,  Inc.,  Boston.  

NON-­‐DIRECT  FINANCING:  60-­‐80%  

CAPITAL  CAPITAL  

CAPITAL  

CAPITAL   CAPITAL  

Financial  market:    

⋅ Bond  market  ⋅ Capital  market  

DIRECT  FINANCING:  20-­‐40%  

Creditor  –  Savers  

1. Families    2. Business  

companies  3. Government    4. Foreign  citizens,  

organizations  

Borrower  –  Users    

1. Business  companies  2. Government  3. Families    4. Foreign  citizens,  

organizations  

Financial  intermediaries:  ⋅ Bank  ⋅ Insurance    ⋅ Pension  fund  

Factors  impeding  proper  development  and  work  of  market:  

⋅ Information  costs  ⋅ Transaction  costs  

Obligations  of  financial  system:  

⋅ Savings  transfer  ⋅ Effective  placement  of  recourses  

⋅ Establishing  of  company  control  

⋅ Improvement  of  risk  management  

⋅ Easing  product,  service  trade  Channel  for  economic  

growth:  

⋅ Capital  accumulation  ⋅ Technology  modernization  

Financial  systems  proven  documents  

   Source:  Mishkin,  FS,  The  Economics  of  Money,  Banking  and  Financial  Markets,  10th  edition,    Pearson  Education,  Inc.,  New  Jersey.  

Bank  loan   Nonbanking  financial  institutions  loans  

Bond   Equities  

USA  

Germany  

Japan  

Canada  

Equities  and  stocks  are  not  main  source  of  business  financing  

⋅ Transaction  costs:(1)  Expansion  effectiveness       (2)    Professionalism  (computer  technology)    

⋅ Asymmetrical  information:(1)  Bad  choice  (Lemon’s  issue)  (2)  Ethics  deformation  (another’s  money)  

 

Financial  intermediaries,  especially  banks  are  essential  source  of  financing  business  activities  

Only  major  companies  are  able  to  raise  financing  from  equities  market  

Financial  system  is  most  regulated  sector  of  economy    

⋅ Increase  of  information  ⋅ Improvement  of  correct  and  transparent  conditions  

⋅ Improvement  of  monitoring  

       

CURRENT  SITUATION  IN  EQUITIES  AND  STOCK  MARKET  

Equities  and  stocks  market  development  (1)  

 

 Source:  Mongol  bank’s  monthly  statistical  bulletin

3,3% 3,0% 2,3% 2,7% 1,3% 1,8% 3,3%

14,5%

7,9% 9,4%

16,3%19,6%

12,9%

5,5%9,7%

14,9%

24,2% 25,7%28,3%

30,4%

41,5% 40,2% 40,3% 38,8%

49,1% 50,1%

0,0%

10,0%

20,0%

30,0%

40,0%

50,0%

60,0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Хөрөнгийн зах зээлийн үнэлгээ, нэрлэсэн ДНБ-ий харьцаа

Банкны салбарын нийт зээл, нэрлэсэн ДНБ-ий харьцаа

0,0

500,0

1000,0

1500,0

2000,0

2500,0

3000,0

2005

01 05 09

2006

01 05 09

2007

01 05 09

2008

01 05 09

2009

01 05 09

2010

01 05 09

2011

01 05 09

2012

01 05 09

Хөрөнгийн зах зээлийн нийт үнэлгээ, сая ам.доллараар

0

2 000

4 000

6 000

8 000

10 000

12 000

0

5 000

10 000

15 000

20 000

25 000

30 000

35 000

2005

01 05 09

2006

01 05 09

2007

01 05 09

2008

01 05 09

2009

01 05 09

2010

01 05 09

2011

01 05 09

2012

01 05 09Топ-20 (max)-Топ-20 (Min), баруун тэнхлэг

Топ-20 индекс (Хамгийн их утга)

Топ-20 индекс (хамгийн бага утга)

0

20 000

40 000

60 000

80 000

100 000

120 000

140 000

0

20 000

40 000

60 000

80 000

100 000

120 000

2007

01 04 07 10

2008

01 04 07 10

2009

01 04 07 10

2010

01 04 07 10

2011

01 04 07 10

2012

01 04 07 10

Нийт гүйлгээний дүн, сая төгрөг

Засгий газрын бонд, сая төгрөг

Компанийн бонд, сая төгрөг

Хувьцаа, сая төгрөг

Sri  Lanka:  40%  Indonesia:  50%  Mongolia:  12.9%  

Cycle related capital market  

Capital  market  value,  declared  GNP  ratio  

Total  loans  of  banking  sector,  declared  GNP  ratio  

Capital  market  value,  million  US$  Top-­‐20  (max)  –  Top-­‐20  (min),  right  axis  Top-­‐20  index  (Maximal  value)  Top-­‐20  index  (Minimal  value)  

Total  transactions  sum,  million  tugrik’s  Government  bonds,  million  tugrik’s  Company  bonds,  million  tugrik’s  Stocks,  million  tugrik’s  

Equities  and  stocks  market  development  (2)    

⋅ As  a  result  of  economic  cycles,  foreign  management  economic  indexes  improves    

⋅ In  the  last  3  years  market  value,  GNP  ratio  is  12.9-­‐19.6%    

⋅ Fail  to  reach  level  of  supporting  economic  development      

⋅ Capital  market  is  small,  and  has  weak  convert  capability    

⋅ Presents  necessity/space  for  financial  market  diversification    

⋅ Banking  sector  and  capital  market  developing  jointly  but  not  mutually  duplicating    

⋅ Researches  up  to  2007  shows  that  this  sectors  developing  without  symmetry  (Private  sector  loans  á  -­‐>  Top-­‐20â,  ЗЗҮ  (Market  former)  â).    

 

   

 

     

EQUITIES  AND  STOCK  MARKETS  RISKS  AND  CHALLENGES  

 Foreign  sector  conditions  is  weak  

 -0.1

0.1

0.3

0.5

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

2.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Худалдааны нөхцөл (баруун тэнхлэг)

Экспортын үнийн индекс

Импортын үнийн индекс

1123

-225-377

-1500

-1000

-500

0

500

1000

1500

2000

2500

I '09

II '0

9

III '

09

IV '0

9

I '10

II '1

0

III '

10

IV '1

0

I '11

II '1

1

III '

11

IV '1

1

I '12

II '1

2

III '

12

IV '1

2

Хөрөнгө ба санхүүгийн тэнцэл

Урсгал тэнцэл

Нийт тэнцэл

838 570

1 630

4 6203 835

0

1 000

2 000

3 000

4 000

5 000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Foreign  direct  investments  decreased  by  17%  (785  million  US$)  

2009:01  1.315  

 

2013:02  1.432  

 Foreign  trade  conditions  worsened  by    

12.5%  

  Current  account  deficit  was  defrayed  

by  capital  and  financial  balance  

profits  

 

Trade  conditions  (right  axis)  

Export  price  index  

Import  price  index  

Capital  and  finance  equality  

Flow  equality  

Total  equality  

Current  conditions  of  macroeconomics  (As  of  February  2013)  

 

• Export  lowering  -­‐  4.5%  

•  Import  lowering  -­‐  13.6%  

•  Frogeign  trade  conditions  lowering  -­‐  12.5%  

•  Foreign-­‐trade  deoicit  -­‐305.2  million  $  

• М2  money  growth-­‐  16.1%  

•  Increasment  of  remainder  of  the  debts  -­‐  21.6%  

•  Inolation  rate  in  Ulaanbaatar    -­‐  11.1%  

•  Inolation  rate  in  state  -­‐  11.3%    

•   Currency  rate  weakening  -­‐  4.6%  

• Actual  GNP  growth  -­‐  12.3%  

• Agricultural  sector  growth  -­‐  21.3%  

• Mining  sector  growth  -­‐  8.9%  

• Others  -­‐  11.3%   Economic  growth  

Inolation,  currency  

exchange  rate  

Foreign  trade  Money,  loan  increasement  

Economy  sensitivity  assessment:  end  of  the  2012    

 

Foreign sector

Budget Money&curre

ncy rate

Finance Society

⋅ Raw material export/Total export: 90.8%

⋅ Export/GNP: 43.9% ⋅ ГВЦАН/Import: 20 долоо хоног

⋅ Trade balance/GNP: 23.6%

 

⋅ Budget balance/GNP:6.7% ⋅ Government dept’s/GNP:

49.6% ⋅ Financial source

necessity/GNP: 7.6% ⋅ Essential expenses/Total

costs:75% ⋅ Raw materials income/Total

income: 32.9%

 

⋅ Inflation: 14.0% ⋅ Actual interests: -0.75% ⋅ Forex resources/GNP:

40.9% ⋅ Currency rate

flexibility: Relatively weak

⋅ Percentage of foreign currency dept’s in total dept’s: 19.2%  

⋅ Equity capital, total assets ratio: 8.2%

⋅ Low grade loan, total loan ratio: 4.2%

⋅ Loan, deposit ratio: 99.7% ⋅ Loan, GNP ratio increase:

2.2%

⋅ Poverty sensitivity: 2.7

⋅ Unemployment rate: 7.7%

⋅ Number of indigents with daily income less than $1.25/total population: 29.8%

⋅ Jeni index: 0.44

Economy sensitivity

Economy sensitivity to foreign shocks is high.

 

Financial sector sensitivity is average.

 

Social sector sensitivity is average.

 

Money, currency rate sensitivity is average-> high.

 

Budget sensitivity is high.

 

Influence  of  internal  shocks  to  capital  market    Tugrik  US$  ratio  weakening  (4Q,  1  p.p)  

A) Top-­‐20  index                                                                                        B)Market  value,  GNP  ratio  

 М2  money  lowering  (4Q,  10%)  

A)  

 

Calderon-­‐Rosel’s  (1990-­‐1991)  capital  markets  loan  development  structure  model  

Miller  &  Mogidlyan’s  (1961)  dividend  deflation  model  

⋅ Actual  money  changes  

⋅ Actual  interest  changes  

⋅ Tugrik’s  declared  rate  changes  

⋅ Copper  price  changes  

⋅ Actual  GNP  ⋅ Actual  М2,  GNP  ratio  changes    

⋅ Inflation  changes  ⋅ Sum  of  capital  markets  transactions  

Quarter  after  impulse   Quarter  after  impulse  Quarter  after  impulse   Quarter  after  impulse  

   

Influence  of  foreign  shocks  to  capital  market    

Deceleration  of  Chinese  growth  (4Q,  1  p.p)                                                

 Copper  price  lowering  (4Q,  10%)  

 

⋅ Actual  money  changes  

⋅ Actual  interest  changes  

⋅ Tugrik’s  declared  rate  changes  

⋅ Copper  price  changes  

⋅ Actual  GNP  ⋅ Actual  М2,  GNP  ratio  changes    

⋅ Inflation  changes  ⋅ Sum  of  capital  markets  transactions    

Quarter  after  impulse   Quarter  after  impulse  Quarter  after  impulse   Quarter  after  impulse  

A)Top-­‐20  index                                                                                              B)  Market  value,  GNP  ratio  A)Top-­‐20  index                                                                                              B)  Market  value,  GNP  ratio  

Economic  growth,  inflation  guiding  indexes    

 

   

2008-­‐09  оны  хямралын  үе  

Э/З-­‐ийн  өрнөлийн  үе  

???  

2008-­‐09  оны  хямралын  үе  

Э/З-­‐ийн  өрнөлийн  үе  

???  2008-­‐09  оны  хямралын  үе  

Э/З-­‐ийн  өрнөлийн  үе  

???  ⋅ In  economic  growth  with  5-­‐6  quarters  delay  

⋅ In  annual  inflation  with  2  quarters  delay  

⋅ In  annual  inflation  with  2  quarter  delay  

⋅ In  economic  growth  with  1-­‐5  quarter  delay  

⋅ In  annual  inflation  with  2-­‐3  quarter  delay    

Foreign  sector  sensitivity  index   Finance  sensitivity  index  

General  sensitivity  index  1   General  sensitivity  index  5  

2008-­‐2009  crisis  period  

2008-­‐2009  crisis  period  

2008-­‐2009  crisis  period  

Economy  growth  period  

Economy  growth  period  

Economy  growth  period  

   

       

SUBSEQUENT  TRENDS  AND  CHALLENGES  OF  EQUITIES  AND  STOCK  MARKET  

Government  securities  primary  market    

 

Electronic  commerce  system  

Ministry  of  finance   Will  issue  Government  securities  according  to  schedule  

Will  offer  Government  securities  

Commercial  banks  Direct  participants  

Citizens,  legal  entities     Bank     Mongol  Bank  

Citizens,  legal  entities  (non-­‐direct  participants)  

SCHCD  

Will  participate  in  Government  security  trade  through  banks  

Will  organize  Government  securities  auctions  

In  a  basis  of  trade  information  will  keep  Government  securities  owners  

Foreign  investment  procedure  in  domestic  bond,  equities  market  

       

International  financial  market  

Foreign  investors  

Domestic  banks  

Foreign  currency  swap  market  Domestic  

banks  Domestic  broker,  dealer  companies  

Government  bond  market  

Mongolian  capital  market  

USD  

LIBOR  USD  

USD  ₮  ₮  

LIBOR  

PR<i<RP  

₮   ₮  

Government  securities  interest  хүү  (12.0%,  1  year)  

₮  

Government  securities,  Government  

bonds  

Companies  securities,  bonds  ₮  

Equities,  bonds  interest  

Will  conclude  executive  agent  contract  

Will  give  sale,  purchase  order  Mongolian  rating  

Moody’s:  B1    

S&P:BB-­‐  

Fitch:B+  

Are  foreign  investors  will  be  interested  in  domestic  Government  bonds?  

5  years:  4.125%+3.2%(45₮)=>7.5%  

10  years:  5.125%+3.2%(45₮)=>  8.5%  

   

Long-­‐term,  stabile  structure  of  housing  financing  Mongol  Bank  (Finance  

intermediator)  

Commercial  bank  

Owners  of  old  housing  

New  housing  payment  

Co-­‐owner  of  new  housing  

State  owned  organizations  in  

mortgage  secondary  market  

(SOOMSM)  

Capital  market    Government   Investors  (SIF  etc.)  

Source   Advance  payment  

Remainder  

Old  housing:  Credit  security  

New  housing:  Credit  security  

Mortgage  loan  

Mortgage  credit  line  

Government  m

edium-­‐

term    bonds  

At  the  first  stage  of  development  –  Government  guarantees  for  

SOOMSM  equities  

(7)  M

ortgage  loan  

Source  

Source  

Equities  secured  by  mortgage  loan  

Equities  secured  by  mortgage  loan  

Source  

(1) (2)

(2)

(2)

(3)

(3)

(3)

(1)

(4)

(5) (6) (6)

(6) (6)

(7) (7)

Mortgage  secondary  market  

Financial  structure  of  purchasing  new  housing  in  a  basis  of  old  housing  

(4)  New  mortgage  loan  

Mongol  Bank,  Government  and  banks  will  conclude  trilateral  contract:  Bank  will  transfer  new  loan  pack,  received  from  Mongol  Bank  and  issued  in  a  basis  of  Government  bond  source  to  the  SOOMSM.    

Some  necessary  works    

⋅ Government  has  to  activate  secondary  securities  market    

⋅ Give  possibility  to  organize  human  benchmark  or  effectiveness  curve  ⋅ Will  be  formed  possibilities  to  use  in  implementation  of  monetary  policy    

⋅ Organize  institutional  investors  based  on  pension  fund    

⋅ Main  investor  in  financial  system    ⋅ Will  be  organized  long-­‐term  sources  

 

⋅ Support  financial  organizations  in  mortgage  secondary  market      

⋅ Issue  MBS  of  become  one  of  the  main  supplier  of  equities  ⋅ Will  be  created  long-­‐term  sources  

   

   

     

ISSUES  TO  BE  CONSIDERED  AT  EQUITIES  AND  STOCK  MARKET  DEVELOPMENT

Basic  conditions  of  market  development    

⋅ Constant  sale  of  Government  equities,  bonds  according  to  determined  schedule,  make  information  transparent      

⋅ Will  be  formed  market  benchmarks  ⋅ Will  be  developed  company  bond  &  derivative  market  ⋅ Search  for  bank  or  foreign  sources  by  companies  will  be  lowered    

⋅ Development  of  market  of  shares      

⋅ Number  of  registered  major  companies  are  low  (6  major  companies:  5  million  $)  

⋅ Improvement  of  assessment  process  ⋅ Create  true,  open  state  of  company  profit,  income  ⋅ Improve  activity  and  capability  of  capital  market  intermediator’s  ⋅ Increase  investors  knowledge  and  trust  

 

⋅ Extend  base  of  institutional  investors:  Joined  investment  fund,  pension  fund,  insurance  companies  

 

   

⋅ Stabile  demand  for  long-­‐term  equities  and  stocks    

Questions  to  be  considered  during  market  development  

 

⋅ Improvement  of  legal  environment    ⋅ Updated  revision  of  Equity  market  law  ⋅ Adjust  in  accordance  with  International  capital  market  principles  

 

⋅ Create  legal  system  oriented  to  power  of  the  companies  and  improvement  of  openness    ⋅  Recording,  audit  standards:  Increase  trust  to  companies  

 

⋅ Give  consideration  to  improve  capabilities  and  potentials  of  capital  market  participants  ⋅ Discuss  market  difficulties,  take  information  about  and  implement  new  products  and  cervices  

 

⋅ Correct  definition  of  subsequent  reforms    ⋅ Prepare  documents  including  challenges,  solutions  and  cooperation  in  the  way  of  capital  market  development    

       

 Thank  you  for  your  attention