Why It Makes Sense To Invest In Iraq… Yes, Iraq

Earlier this month, the Iraqi Stock Exchange (ISX) floated its biggest ever initial public offering – raising $1.3-billion in shares of Asiacell Communications (TASC:IQ), an Iraqi mobile phone operator.

It was, in fact, the biggest IPO in the Middle East in five years.

Even more remarkable, 70 percent of the share buyers came from overseas (particularly the Persian Gulf states), suggesting higher confidence in a country struggling to recover from decades of war (with the Americans, the Kuwaitis, the Iranians and each other) and the devastating legacies of Saddam Hussein’s brutal regime.

Shwan Ibrahim Taha, chairman of Rabee Securities, the Baghdad brokerage that exclusively organized the Asiacell offering, told the Wall Street Journal that demand slightly exceeded the number of shares available.

Established in 1999, Asiacell has more than 10 million subscribers and is controlled by Qatar Telecom (DSM: QTEL), which owned a 54 percent stake just prior to the IPO. The Journal noted that Qtel had earlier stated its intention to increase its ownership in Asiacell to 60 percent.

Managing director and company founder Faruk M. Rasool is also a key shareholder in Asiacell.

A profitable company, Asiacell is one of three mobile operators in Iraq – the others, Zain Iraq, a subsidiary of the Zain Group, and Korek Telecom, an affiliate of France Telecom S.A. (NYSE: FTE), have yet to go public.

Asiacell’s public offering almost doubled – to about $10 billion -- the market cap of companies in the tiny, largely illiquid ISX, which was introduced in 2004 (one year after the U.S.-led invasion that toppled Saddam) and now lists 84 stocks.

While the oil sector dominates the Iraqi economy (which still attract the bulk of foreign investments), banking and finance securities dominate the exchange.

Self-regulated, but under the supervision of the independent Iraq Securities Commission, the ISX also comprises companies engaged in insurance, retail, construction, beverage and retail.

But where Iraq is concerned, it’s still all about oil.

Indeed, it is the ramp-up of oil production that has propelled Iraq’s economy – GDP is expected to surge by 9 percent in 2013, according to acting central bank governor Abdul-Basit Turki al-Sae'ed, following a 10 percent spurt last year.

Moreover, the Iraqi central bank’s foreign reserves are expected to reach $110 billion by the end of the year, while Iraq’s oil production surpassed 3 million barrels-per-day for the first time in 30 years (at 3.4 million, it's up 40 percent in just three years).

"We have had three wars, 13 years of economic sanctions and we still have a lot of problems, but we are expanding [our economy] by double digits," said Taha.

Hence, as oil largely supports the Iraqi economy, underneath a diverse array of other sectors are poised for growth.

Richard Greer, a partner of Laurel Capital Kingsway LLP in London, recently penned a column in the Financial Times in which he extolled some of Iraq’s economic virtues.

“[There are now] the beginnings of some sense of civil order, the accumulation and investment of corporate cash, and a widening economic growth,” he wrote.

“Most of the wealth created may yet disappear overseas, but given Iraq’s mercantile tradition, there will be plenty available to fund corporate growth through the local stock exchange.”

Indeed, sectarian violence, still a plague in Iraq, has plunged by some 90 percent since the peak years of killings in 2006-2007.

“In the cities, 24-hour street life has returned, and there is a free and relatively safe movement of people and goods around the country,” Greer noted.

Inflation in Iraq is moderate at 5 percent -- extremely low for an unstable emerging or frontier market.

In addition, the International Energy Agency estimates that Iraq will account for 45 percent of the globe’s marginal oil production over the next two decades, replacing Russia as the world’s second-biggest oil exporter.

As a result of rising oil income, Greer points out, consumer spending has returned, citing that in 2011 General Motors (NYSE: GM) sold 32,000 cars in Iraq, making it the automaker’s second-largest market in the region.

Still, with dozens of people killed in terror attacks every month, compounded by the endless intrigues surrounding Prime Minister Nouri al-Maliki and his Sunni and Kurdish enemies, foreign investors are likely to be turned off by Iraq as an investment target.

Even Taha admitted to Western media that Iraq is “a very difficult place to do business in. No foreign investors come to Iraq thinking they are investing in Switzerland, and for Iraqis themselves, these bombings are becoming daily occurrences.”

Taha al-Rubaye, the chief executive officer of the stock exchange, said he hopes the successful Asiacell IPO leads the government to enact more policies to encourage further foreign investment and diversify the Iraqi market away from an ove-dependence on oil.

“It’s not easy to change . . . the mentality [of people in power],” al-Rubaye told Associated Press. “There are delays. They are not in a hurry. But I believe it’s also time because the relationship between Iraqis and the world is growing up.”

So, will Asiacell mark a turning point for Iraqi markets?

“The success of the Asiacell IPO will encourage other companies to go public on the ISX,” Hasan Abdul-Karim, chairman of Aljazera Brokerage Co., told The Economist.

Sanjay Motwani, president and portfolio manager for Sansar Capital, who manages one of the largest equity funds in Iraq, the Frontier Fund, believes Iraqi stocks are poised for extraordinary growth.

Motwani commented that sometimes the best investment opportunities present themselves unexpectedly during periods of fear, stress and uncertainty.

“The fundamentals on the ground [in Iraq] -- strong growth, strong credit growth, booming earnings, low foreign ownership -- makes one salivate at the opportunity,” he said.

Indeed, many stocks on the ISX currently trade at a P/E of about 4 (versus almost 15 for the S&P 500 index as a whole).

Noting that Chicago has a higher homicide rate than Iraq, Motwani said that if Iraq were not on the news every day for bomb blasts, Iraqi stocks would command a much higher multiple given the underlying immense growth opportunities. 

“We can thank the media for keeping the [price] multiple down,” he added.

Investment opportunities like Iraq will not stay undiscovered forever, Motwani warned.

“Violence has been on a decreasing trend and we expect that to continue,” he stated.

“From our visits to Baghdad and other cities, it seems the locals are tired of fighting and just want to get on with life. Hence, when there are sectarian conflicts, they do not necessarily flare up and spread.”

Motwani believes Americans and other Westerners have a distorted view of the situation in Iraq.

“We think this partially stems from the Western media, which focuses more coverage on the negative aspects, like bombings, rather than the positive -- like the rebuilding of the country,” he said.

“There have also been few stories in the American media on the emerging economy in Iraq and what this means to the area in the near future.”