November 1, 2011The Baghdad bourse
With the third-largest proven oil reserves in the world and forecast growth of around 10% for the next five years, Iraq looks ripe for investment.
Yet it stock market is still tiny, with a market cap of just under $4bn compared with $350bn in neighbouring Saudi Arabia.
Partly this is down to residual nervousness on the part of international investors over Iraq’s security situation. Yet the main barriers to market development – and the factors deterring all but the most adventurous Western asset managers from buying Iraqi equities – have been the lack of a recognised custodian bank to provide security for investors and a severe shortage of liquidity. Although 85 firms are listed on the Iraq Stock Exchange (ISX), barely more than 30 are actively traded and average daily turnover is in the region of $2m.
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There are signs, however, that Iraq’s equity market is reaching a tipping point. Recent reports suggest that by the end of 2012 at the latest, a major global custody provider – rumoured to be HSBC – will offer the necessary platform for mainstream global funds to move into the country. And for those that do, the range of liquid investment opportunities is likely to be expanded significantly from the current handful of financial and tourism stocks, thanks to regulatory-driven off erings from Zain Iraq, Asiacell and Korek Telecom – key telecoms providers that are all due to list in the coming months.
Iraq’s stock market already offers many of the essential features that attract emerging market investors. Since 2009, shares on the ISX have been traded via a Nasdaq/OMX electronic system instead of the traditional blackboard method used in many frontier markets, and unlike in Gulf states such as Qatar there is no limit on foreign ownership of Iraqi companies.
More importantly, however, Iraq has shown itself relatively immune to the turmoil that has roiled equity markets over the past year. Local data is unreliable but boutique frontier-market specialist FMG has seen returns on its dedicated Iraq fund, the second-largest in the market, reach 13.5% year-to-date. The ISX even managed to turn in a positive performance in August and September, when more developed emerging markets showed double-digit losses.
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