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Avoiding Small Caps With Mongolia-Like Fortunes - Views on News from Equitymaster
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The Equitymaster Research Digest

Avoiding Small Caps With Mongolia-Like Fortunes
Feb 21, 2017

  • Saying 'No' to fast-growing smallcaps
  • Notebandi hits auto stocks like no other
  • The ROE problem at IT firms
  • Apurva's hatrick

Yesterday, Mongolia secured a US$5.5 billion IMF bailout.

Not so long ago, it was the world's fastest-growing economy. Now, by nearly every metric, it's in a dire fix. Its debt has surged, its currency has plummeted, and its budget deficit has widened alarmingly. Foreign investment has dried up and economic growth all but ceased.

Making matters worse, some staggering bills are coming due. The government and a state-backed development bank are liable for bonds ofUS$1 billion maturing over the next year. They need to start with a US$580 million payment due in March. As per news reports, locals are so anxious they're donating their gold and horses to help the government avoid default.

Until five years back, the economy had a huge appeal. It boasted of expansive mineral reserves and a long border with the world's second-biggest economy. Mongolia's economy grew 17% in 2011. And its mines churned out huge amounts of coal and copper to meet Chinese demand.

The nation bore a striking resemblance to a fast-growing small-cap company.

The Mongolian government, however, made the cardinal mistake of borrowing beyond its means. To add to the misery, commodity prices plunged and the Chinese growth halted.

Like the several high potential small-cap companies we have met over the years, Mongolia could have been an investor's dream. But reckless growth did it in.

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