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emerging markets

Traders update share prices at the Iraq Stock Exchange in Baghdad in this October 9, 2008 file photo.THAIER AL-SUDANI

In the midst of the turmoil rumbling through the Arab world, investors have been slowly discovering a market of rising potential and new-found stability in a place where one might least expect it.

Downtown Baghdad.

The Iraq Stock Exchange (ISX), launched seven years ago but until recently a stagnant backwater of an equity market, is up 30 per cent since mid-December - about the time its new government finally began to take shape and the United Nations lifted the last of its long-standing sanctions against the country. Net foreign inflows into the stock market in just the first two months of 2011, at more than $20-million (U.S.), represent almost half of the total for all of 2010.

This at a time when civil war in Libya, political upheaval in Egypt and simmering unrest elsewhere in the Middle East and North Africa (MENA) have sent the region's stock markets downward: The S&P Pan Arab index, an index of 11 stock markets in the Arab world, has dropped 6 per cent since the beginning of 2011, including a slide of more than 20 per cent in Egypt.

The contrast between Libya's current mess and Iraq's growing turnaround shows how quickly a country can go from investing pariah to an attractive (if still risky) opportunity.



Index

YTD change (Adjusted to $US)

S&P Pan Arab composite

-6.2%

Bahrain

-2.2%

Egypt

-22.7%

Jordan

-6.9%

Kuwait

-7.9%

Lebanon

-4.0%

Morocco

+5.0%

Oman

-5.8%

Qatar

-3.9%

Saudi Arabia

-4.0%

Tunisia

-10.0%

United Arab Emirates

-7.6%

Northern Gulf Partners Iraq20

+21.6%



Many frontier-market experts view the recent turmoil in Arab nations as only the early stages of what could be a lengthy, politically and religiously volatile period in the region - one that could keep a shadow of uncertainty over investing for months or even years to come.

But the contrast between Libya's current mess and Iraq's burgeoning turnaround shows just how quickly a country can go from a war-torn investing pariah to an attractive (if still risky) opportunity. As the political uncertainty and economic isolation fade from Iraq's investment landscape, growing numbers of foreign investors now see a chance to get in on the ground floor of a market that looks poised to unlock its long-dormant potential.

"Iraq is very much opening its business doors to the world," said Ken Kuhn, president of Global Capital Investments - a U.S. investment management firm that is developing an investment fund specializing in the Iraq market. "They have some of the largest oil reserves in the world, and a lot of them are underdeveloped."

The new government has ordered its banks to re-capitalize and is planning to privatize roughly 200 state-owned enterprises - a strategy designed to attract foreign capital and accelerate an economic renaissance. All of which presents a potentially enormous upside to a stock market that is still in its infancy.

The ISX had only 85 listings as of the end of February, with a combined market capitalization of $3.4-billion. To put that into perspective, The Toronto Stock Exchange (with more than 1,500 issuers listed) contains 100 stocks that each have a market cap larger than the entire Iraqi market.

More than two-thirds of the market are banks. Other key sectors are industrials, agriculture and tourism. Energy-related companies remain only a minor element, as most of the country's domestic energy assets are in government hands, but it's clearly a major area of potential growth as more foreign investment is brought in to help further develop the country's oil and natural gas business.

Until two years ago, the ISX amounted to a hand-written whiteboard on which staff furiously scribbled and erased prices for a handful of traders in one small room. The exchange went to electronic trading in the spring of 2009, paving the way for international investing. Trades that used to take literally weeks to be formally completed now can be done in eight seconds - still slow by Western standards, but a quantum leap forward.

Mr. Kuhn looks at the Iraqi market and sees some of the same potential that was unlocked for investors in another major oil exporter that transitioned from a totalitarian government to a capitalist market system: Russia.

"There are historical precedents for countries that have rebuilt after an economy collapsed and a government collapsed," he said.

The sea change in Iraq's political and economic system that was forced upon it by the U.S.-led invasion may have actually put it ahead of many of its Arab-world counterparts in creating the conditions for attracting substantial foreign investment - something that has been somewhat elusive for much of the region in the past.

"In general, the MENA region is one where they trade mainly among themselves, and not so much with the rest of the world. These markets are quite insulated," said Richard Kang, chief investment officer at Emerging Global Advisors LLC, a New York-based manager of emerging markets exchange-traded funds.

"The reality is, the region doesn't have the same benefits, other than young demographics, as other emerging markets."

However, the prospect of sweeping political changes - something Iraq has already achieved, though it's still early days to gauge how stable its new system will be - could change that, if recent history in other emerging markets is any measure.

"Eastern Europe is a shining example of how the fall of autocratic regimes lead to more open, investable markets," said Nick Chamie, head of emerging markets research at RBC Dominion Securities.

Mr. Kuhn's Global Capital Management is about half way to raising the $10-million it wants to launch its first Iraq fund, and it hopes to raise as much as $100-million in a second phase of marketing once the fund establishes its initial success. He said any bigger fund than that would potentially skew the entire Iraqi market: $100-million would represent 3 per cent of the entire ISX.

"Of course, we want to make money for our partners," he said. "But we also hope in some small way to contribute to prosperity there, through investment."

The door to Iraq

Despite its growth spurt, the Iraq Stock Exchange is still too small to be on the radar of the prominent brokerage houses of the world - let alone your neighbourhood broker. So if you're wondering about investing in this fledgling frontier market, know right up front that it won't be as simple as making a phone call.

Non-Iraqi investors are eligible to invest on the ISX, but must do so through one of the 45 local brokerage firms registered to trade on the exchange. You'll need to open an account with one of them - a process that includes providing identification, passport information and signature samples verified by the Iraqi Embassy in Ottawa. Once you do this, you can appoint a representative - such as your broker here in Canada, depending on the type of brokerage account you have - to conduct trades through your Iraqi brokerage account on your behalf.

Alternatively, you could invest in one of a small handful of hedge funds specializing in Iraqi equities. The granddaddy of these funds is the $21-million (U.S.) Babylon Fund, set up by Luxembourg's Godvig Capital Management in 2006; if you prefer something based closer to home, there's the newcomer Iraq Fund from Chicago-area manager Global Capital Investments Inc. But these aren't for everyone; typically, you must be an institution or a high-net-worth investor to even qualify for such funds, and the minimum investment for qualified investors is $100,000 (U.S.).

David Parkinson