The Mongolian Stock Exchange (MSE) had an impressive year in 2010 as the best performing equity market globally. Driven by positive investor sentiments, the market still retains the title this year, climbing +64% YTD (+73% in US$ terms due to a 4.9% YTD appreciation of the MNT against the US$ as of March 31). We anticipate such strong performance will continue throughout 2011, fuelled by resource‐linked investments and developments.

The MSE Top Index, the benchmark for the country’s domestic equities, hit our projected level of 20,000 two weeks (on January 26) after we released our 2011 end‐year estimate in our Mongolia Outlook 2011 report (January 11, 2011). The benchmark continued its rally to peak at 32,955 (increasing 123% YTD) on February 25. The MSE has since seen a 27% correction, falling to 24,187 as of March 31. In our view, the rally was driven by over speculation and did not reflect the market fundamentals. This sharp volatility is the result of low liquidity and small free‐float of listed companies. Since the start of the year until February 25, the MSE gained US$1,736mn in total market capitalization with a total trade volume of US$7.9mn (or slightly over US$210,000 in average daily trade). During the following correction, US$780mn in total market capitalization was lost through a mere US$388,000 daily trade volume. In our view, low liquidity will remain a concern in 2011.

Experts expect the MSE to enjoy growing investor interest thanks to a strong economic outlook in 2011 and beyond. The country’s GDP is expected to grow at least 10% this year and continue double‐digit expansion annually for the rest of this decade.

The MSE is expected to retain its title among the top three equity markets in 2011, if not the best. In this report, we revaluate and update our equity ratings for the Top Index‐listed stocks and include five additional companies based on their strong earnings outlook. We also expect that the fixed income market will offer attractive opportunities on future appreciation of the national currency, the Mongolian tugrik.