Investors play a long game for bargains in strife-torn Iraq

“Buy when there’s blood in the streets” — credited to Baron Nathan Rothschild, 1871

Fund managers focused on the Iraqi Stock Exchange (ISX) say that last year’s events presented an opportunity to buy shares in listed companies at bargain prices — but only if investors are willing to play the long game.

They say that in areas such as the Iraqi banking sector — which makes up more than 50 per cent of the ISX — blue-chip listed banks are trading at or below book value but still providing dividend yields of up to 10 per cent, making them an excellent long-term bet.

“We have historically seen growth rates of around 30 per cent in the banking sector, and see huge long-term potential in this largely unbanked market,” said Henrik Kahm, an investment analyst at FMG, a US fund management company.

Sherif Salem, a portfolio manager at Invest AD in Abu Dhabi, said that while profits were down across the sector last year, loans and deposits year on year were up, as a double-digit decline in the third quarter was followed by a sharp reversal in the fourth quarter.

Geoffrey Batt, who manages an ISX-focused fund for New York-based Euphrates, pointed out that the largest private banks in Iraq have roughly US$1.5 billion in assets, up from less than $100 million a decade ago. “We believe a few of these banks, particularly ones that focus on Baghdad and southern Iraq, will have $20bn to $30bn balance sheets in seven to 10 years. That would imply earnings of $400m to $600m, which exceeds their current market caps.”

Indeed, from a general investment perspective, fund managers and investors find the same aspects of the Iraq economy attractive as they did in 2009 and 2010.

A country of 35 million with huge oil reserves, potential growth in Iraq was being estimated pre-ISIL as high as 8 per cent annually by the World Bank. While those expectations will have fallen for this year, the fundamentals remain.

“You could argue that there is the same potential. There is the added risk, of course, but as far as the outlook and the potential that we saw when we first launched our fund — and that is a country that was rebuilding, demographic favourable with a lot of pent-up demand — that is still there,” said Mr Salem.

Mr Batt agreed, adding that the issues Iraq faced last year and will continue to tackle in 2015 would not put Euphrates off Iraq, even if its fund fell 13 per cent in 2014.

“Volatility often results in mispriced assets, especially in small, illiquid markets like the ISX. Extreme price declines do not bother us because we are not concerned with performance on a monthly or quarterly basis,” he said.

“We want to buy businesses that can grow 10 to 20 times in the next decade, and if market volatility allows us to buy those businesses at lower prices we are happy to exploit the opportunity.”

Fund managers are focused on other areas too, citing the ISX heavyweight Baghdad Soft Drinks, which fared well in 2014, only showing a revenue drop of 8 per cent despite the political and economic issues over the past eight months.

“It is one of the few listed consumer companies in the developing markets that looks very attractive. The company is looking to expand into new product segments, fuelling growth,” said Mr Kahm.

Follow The National's Business section on Twitter