The best ways to invest in Mongolia

Until recently, Mongolia was "an overlooked frontier", says John Polomny on Seekingalpha.com. No longer. This $5bn economy with just under three million people is thought to have the world's second-biggest reserves of copper and uranium, and the 11th biggest stock of coal. It is also next to China, which has an "insatiable" appetite for raw materials.

Last autumn saw a long-awaited agreement between the government, Ivanhoe Mines and Rio Tinto. They will develop Oyu Tolgoi, a copper and gold mine, which will start production in 2013 and could, according to the Mongolian government, operate for 30 years and produce $30bn-$50bn of revenue. Throw in further projects and it's clear why Renaissance Capital thinks Mongolia could become the fastest-growing economy in the world over the next decade.

Rising mineral wealth will help spur consumption. According to the Japanese cosmetics group Shiseido, the market for some cosmetics has almost doubled since 2003. Mongolia stands to benefit from "the convergence of three booms", say Rob Cox and Richard Beales on Breakingviews, "in China, in commodities and in emerging markets". No wonder the small stockmarket has soared, with the MSE Top 20 Index the world's best performer so far this year, up 134% in dollar terms.

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Mongolia has become the "newest 'in thing' in the world of investing", says the FT's David Stevenson. There is now even a Mongolian equity-tracking index, launched by Eurasia Capital, and an ETF on the index may follow. But investors should be wary. The index is "a vulnerable, young waif" skewed heavily towards exploration groups. Chris Rynning of Origo Partners reckons that many Mongolian firms will "struggle to meet their production targets" because the required infrastructure will be slower to arrive than expected. The local market, moreover, will be buffeted by "inevitable" bubbles investors rush into.

For now, then, investors should research some of the foreign firms with Mongolian operations listed in the Eurasia index, says Stevenson. Examples include Canada's Entre Gold (CN: ETG), UK-listed Central Asia Metals (LSE: CAML), and Origo Partners (LSE: OPP). Origo is a private-equity group that concentrates on China-linked opportunities and is rapidly growing its Mongolian presence. It is on a 30% discount to its net asset value.