invest in iraq stock exchange conference session v: capital market role in stimulating and...
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Invest in Iraq Stock Exchange conference
Session V: Capital Market Role in Stimulating and Attracting Foreign Investments
Mr. Geoffrey BattFounder & Managing Member
Euphrates Advisors LLC
The Iraqi Equity Market
Euphrates Iraq Fund
The Tigris River, Baghdad
– Invest in Iraq Stock Exchange Conference –Dubai, May 14-15, 2014
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Confidential: Euphrates Advisors LLC
Fears in IraqSeveral basic fears dominate any discussion of Iraq
“Iran’s Secret Plan for Mayhem”(New York Sun, Jan 3, 2007)
“Iran Eyes Spiritual Leadership of Iraq’s Shiites”(Associated Press, April 5, 2012)
“How to Save Iraq from Civil War”(New York Times, Dec 27, 2011)
“Iraq’s Leader Becoming New Dictator, Deputy Warns”(CNN, December 13, 2011)
“Iraq Risks Return to Dictatorship, Kurdish Leader Says”(Bloomberg, April 5, 2012)
“Iraqi Kurd Leader Hints at Secession”(Associated Press, April 25, 2012)
“Iraq ‘Could Break Up’ Warns Vice President”(BBC, April 19, 2012)
1. “Iran will interfere and take over.”
2. “Maliki is a dictator.”
3. “The Kurds will secede.”
4. “There will be a civil war.”
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Confidential: Euphrates Advisors LLC
We Have Seen This BeforeSimilar fears appeared in markets throughout history. They often mark the early days of historic rallies
1. Foreign invasion or meddling
2. Rise of a dictator
3. Chaos and widespread civil unrest
4. Regional secession
Fears that Dominate Markets Before Historic Rallies
(and that Dominate Iraq Now)
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Confidential: Euphrates Advisors LLC Lessons from HistoryPost-War Italy
Riots, assassinations, political crises and resurgent Communists did not derail the Italian rally in the 1950’s
01/31/1945 09/30/1946 04/30/1948 11/30/1949 06/30/1951 01/31/1953 08/31/1954 03/31/1956 10/31/1957 05/31/1959 12/31/19600
100
200
300
400
500
600
700
800
900 Italian Stock Index (USD)
“Mobs Fight Police in New Rome Riots on Trieste Issue”The New York Times (March 26, 1952)
“Riots Sweep Italy After Assassin Wounds Togliatti”The New York Times (July 15, 1948)
“Political Crisis Deepens in Italy. Situation Is Most Confused Since War”The New York Times (February 1, 1954)
“Premier of Italy Curbs Red Press”The New York Times (May 9, 1954) +898%
Source: Global Financial Data, Euphrates Advisors Research.
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Confidential: Euphrates Advisors LLC
08/31/194809/30/194910/31/195011/30/195112/31/195201/31/195402/28/195503/31/195604/30/195705/31/195806/30/195907/31/19600
10
20
30
40
50
60
70
80
Germany DAX Composite Index (USD)
Lessons from HistoryPost-War Germany
Riots and resurgent Nazis and Communists presaged a 2,800% rally in German equities
“30,000 German Reds Riot”New York Times (May 12, 1952)
“Nazis Said to Get Posts”New York Times (January 15, 1949)
“U.S. Soldiers Rout Stuttgart Rioters”New York Times (October 29, 1948)
+2,848%
Source: Global Financial Data, Euphrates Advisors Research.
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Confidential: Euphrates Advisors LLC
Jan-64 Jan-66 Jan-68 Jan-70 Jan-72 Jan-74 Jan-76 Jan-78
0.02
0.2
Korea Stock Price Index (KOSPI) (USD, log scale)
Lessons from HistorySouth Korea
South Korea was plagued by massive social unrest and martial law as stocks rallied
“Riots Rage in 7 South Korea Cities”Washington Post (June 5, 1964)
“Korea Student Riots Rooted in Question of Police Power”Washington Post (June 17, 1967)
“S. Korea Calls State of Emergency”Chicago Tribune (December 6, 1971)
“South Korea Chief Orders Martial Law”Chicago Tribune (December 6, 1971)
+1,394%
Source: Global Financial Data, Euphrates Advisors Research.
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Confidential: Euphrates Advisors LLC Lessons from HistoryMalaysia (1970’s)
12/31/1969 01/31/1971 02/29/1972 03/31/1973 04/30/1974 05/31/1975 06/30/1976 07/31/1977 08/31/1978 09/30/1979 10/31/1980 -
50
100
150
200
250
300
350 Malaysia KLSE Industrials Index (USD)
Radical Islam, assassinations and regional insurgencies did not prevent the Malaysian index from rising 900% in an otherwise terrible decade for most indices
“Emergency Panel Rules in Malaysia”The New York Times (May 17, 1969)
“New Violence Breaks Out in Malay City”The Sun(May 26, 1969)
“Deputy Chief Seizes Power In Malaysia”Chicago Tribune (May 17, 1969)
“Reds in Malaysia Increase Terrorism”The New York Times (April 26, 1970)
“Malaysia’s Top Policeman Shot to Death in His Car”The New York Times (June 7, 1974)
“Islam Growing Fastest in a Malaysian State; Charges of Pressure to Convert Are Heard”The New York Times (September 18,1974)
+909%
Source: Global Financial Data, Euphrates Advisors Research.
The Security Situation in Context
Source: Euphrates Advisors research; Rosstat (various reports); UNODC Homicide Statistics; Colombian National Police Crime Reports; “Murder in the RSA for the Period January to December 1994-2002; 2003/2004 to 2009/2010, South African Police Crime Service; Bloomberg.
The security situation in Iraq is vastly improved from recent history and is lower than other emerging markets during their periods of high equity returns
Fatalities due to Violence: Iraq vs. Other Emerging Markets(Terrorism, Murder, Non-Negligent Manslaughter; incidents per 100,000 people)
2006 (Civil War)
2007 (Civil War)
2008 2009 2010 2011 2012 2013 Average Post-Civil War Iraq
(2008-13)
Russia (1997-2008)
Brazil (2000-08)
South Africa (2000-08)
Colombia (2000-08)
0
20
40
60
80
100
120
102.3
86.9
32.2
16.5 12.8 12.6 13.6
22.9 18.4
23.8
30.7
42.9
48.8
9
Central North West South0
1,000
2,000
3,000
4,0003,741
881
401
82
Civilian Deaths from Violence in Iraq (by region)(August 2013 - January 2014)
Significant Regional DifferencesMoreover, security in Iraq varies significantly across regions
Community Organizing in the South: Billboard in Basra showing al-Qaeda members and highlighting local progress in the fight against terrorism
10Source: Iraq Body Count; U.S. Embassy Baghdad; Euphrates Advisors Research.
Iraq’s Scalable Economy
Rashid Street, Baghdad
11
GDP Growth
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014e $-
$50
$100
$150
$200
$250
$300
$26 $37
$65
$89
$132
$112
$136
$181
$213 $222
$239
Iraq GDP(Nominal, Billions US$)
Source: World Bank.
Increased oil production (and exports) is driving Iraq’s exceptional GDP growth
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GDP Growth in ContextIr
aq
Aze
rba
ija
n
An
go
la
Mo
ng
oli
a
Turk
me
nis
tan
Ka
zakh
sta
n
Gh
an
a
Eth
iop
ia
Ch
ina
Uzb
eki
sta
n
Za
mb
ia
Uru
gu
ay
Ind
on
esi
a
Ru
ssia
Rw
an
da
Bra
zil
Taji
kist
an
Eg
ypt
Para
gu
ay
Co
lom
bia
Vie
tna
m
Arg
en
tin
a
Ge
org
ia
Bo
livi
a
Nig
eri
a
0%
100%
200%
300%
400%
500%
600%
700%
800%724%
674%
477%
416% 393%367% 358%
329% 326% 325%280% 258% 242% 241% 240% 239% 237% 226% 217% 216% 212% 210% 209% 208% 199%
Cumulative GDP Growth (Real)(2004-2012)
Iraq had the highest cumulative GDP growth in the world since 2004, a process which had a material impact on the relative size of its economy
Source: Central Bank of Iraq, IMF, Euphrates Advisors Research.13
Equity Market DisconnectIraq’s equity market has not kept pace with the country’s exceptional GDP growth
Source: World Bank, ISX14
2005 2013$0
$50
$100
$150
$200
$250
$37
$222
GDP of Iraq(Nominal, Billions US$)
+500%
2005 20130
50
100
85 85
Number of Companies Listed on the ISX
0%
The Iraqi Market in ContextIraq’s equity market pales in comparison with its emerging market peers
Source: Bloomberg, ISX15
Pakistan Vietnam Nigeria Iraq0
100
200
300
400
500
600 572
302
193
85
Number of Listed Equities (2014)
Pakistan Vietnam Nigeria Iraq0
20
40
60
80
100
120
140
160
141
99
65
21
Number of Companies with at Least $3 Million in Annual Profit (2014)
The Iraqi Market in ContextIraq’s equity market pales in comparison with its emerging market peers
Source: IMF, World Bank, Bloomberg, ISX.16
Nigeria Pakistan Vietnam Iraq0
10
20
30
40
50
60
70
80
90
$77
$72
$46
$10
Market Capitalization of National Stock Exchanges
(Based on Broad Market Indices)(Billions US$)
Pakistan Vietnam Nigeria Iraq (2005)
Iraq0%
5%
10%
15%
20%
25%
30%
35%
30.4%
27.9%
24.6%
5.7%4.2%
Market Capitalization of National Exchange as % of GDP
Iraq’s Potential GrowthPakistan’s experience over the last 14 years highlights the potential growth Iraq’s equity market could undergo with the proper market structure
Source: Bloomberg, Euphrates Advisors Research.17
Apr-00 Apr-02 Apr-04 Apr-06 Apr-08 Apr-10 Apr-12 Apr-14
10
60
110
160
210
260Karachi All-Share Index (USD)
+1,929%
Recommendations
Incentives to List on ISX
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• Help make Iraqi businesses aware of the benefits of listing on the exchange, such as the ability to raise low-cost equity capital to finance expansion.
• Create 5-year corporate income tax holiday for companies that list more than 15% of their equity on the ISX.
• Existing companies are grandfathered
Recommendations
Modernize Market Procedures
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• Reduce the number of step required to list.
• Allow companies to offer rights at market price, not par (1 IQD) to avoid dilution
• Current system unnecessarily increases number of shares, benefiting short-term traders at the expense of long-term investors. Why should a stock trading at 40 IQD offer rights at 1 IQD? No other capital market operates like this.
• Bonus shares and rights immediately tradable
Recommendations
Custody
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• Make 3rd party custody a priority
• Remove or lower the capital commitments required of custodians to operate
• The absence of standard custody arrangements is preventing the entry of large global investors
Recommendations
Build an Equity Culture
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• Remove individual capital gains tax
• Reduce gross taxable income by amount invested in Iraqi equities.
• Educate the Iraqi public about role of capital markets in building wealth.
• Promote stocks as store of value, not as objects for short-term speculation.
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Contact Information
Euphrates Advisors80 Broad Street
Fifth FloorNew York, NY 10004
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THE INFORMATION CONTAINED HEREIN WAS OBTAINED FROM SOURCES BELIEVED TO BE RELIABLE. HOWEVER, NO REPRESENTATION IS MADE THAT IT IS ACCURATE OR COMPLETE. FORWARD-LOOKING STATEMENTS HEREIN REPRESENT OPINIONS OR PREDICTIONS OF FUTURE EVENTS, AND ARE NOT GUARANTEES OF FUTURE PERFORMANCE. ACTUAL FUTURE RESULTS MAY DIFFER MATERIALLY. WE DO NOT UNDERTAKE ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS HEREIN TO REFLECT EVENTS, CIRCUMSTANCES OR CHANGES IN EXPECTATIONS AFTER THE DATE OF THIS DOCUMENT.
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