Courtesy of The Financial Times, a report on the Mongolian stock exchange:

“…The world’s best-performing stock market last year was, of course, in an emerging economy. But rather than a steel-and-glass tower rising above a heaving megalopolis, it was in a cheerful pink former children’s cinema in Ulan Bator.

This is the Mongolian Stock Exchange, where share prices climbed 121 per cent in local currency terms in 2010 – more than any other market tracked by beyondbrics – and have jumped another 50 per cent this year.

The exchange has 340 or so listed companies, 45 brokers, and sees turnover of about $200,000 on a fast day. Mongolia itself has vast untapped reserves of coal, copper and gold, and because the exchange is open to foreign investment – unlike those in neighboring China – the Soviet-styled cinema house has become a focal point for investors betting that China’s growth will continue to fuel a commodities supercycle throughout the region.

Total capitalisation is now $1.4bn—or roughly one-fifth of Mongolia’s GDP (official GDP data for 2010 hasn’t come out yet).

Driving this growth has been an inflow of new capital, say investors, primarily from foreign funds that are looking to increase their exposure to the Mongolia story.

“We’ve been getting a lot of orders over the last month from our clients and pushing [the exchange] up,” says Lee Cashell, chairman of Asia Pacific Investment Partners, a Mongolia-focused investment group. Because of the small volumes on the exchange, “when you get up to a million USD you can really move the market.”

Anticipating enormous copper and gold revenues over the next decade the Mongolian state is building infrastructure to cope with rising investment.

While this includes physical infrastructure in the form of roads and railways, financial infrastructure is also an important project for the technocratic government.

Mongolia’s prime minister has over the past year repeatedly stressed the need to deepen the capitalisation of the stock exchange, in part through privatising state-owned assets and listing them on both the Hong Kong and the Mongolian exchange.

Sardor Koshnazarov, head of research for Eurasia Capital, says: “Fresh capital and new investors, both institutional and individuals, are coming into the Mongolia equities markets. . . we will not be surprised if Mongolia keeps its title [as best performing stock market] for the whole year again.” According to some analysts, foreign investment accounts for between 10 and 30 per cent of the value of the exchange.

So is Ulan Bator the next big bubble? Not according to Cashell. “It’s not that the stock market is a bubble, it’s more that there is a bottleneck there,” he says, citing the lack of new issuance during the last 18 months. “There is not a lot for sale right now because people expect that prices will continue to go up this year,” he explains.

The exchange could be getting an overhaul soon thanks to a partnership agreement with the London Stock Exchange. In Ulan Bator, traders are already buzzing about the idea of a 24-hour exchange linked with London traders that could boost liquidity in the market. But for now, the pink house seems to be doing just fine.