Transcript Fears in Iraq - Iktissad Events

Invest in Iraq Stock Exchange conference
Session V: Capital Market Role in Stimulating and Attracting Foreign
Investments
Mr. Geoffrey Batt
Founder & Managing Member
Euphrates Advisors LLC
The Iraqi Equity Market
The Tigris River, Baghdad
Euphrates Iraq Fund
– Invest in Iraq Stock Exchange Conference –
Dubai, May 14-15, 2014
Confidential: Euphrates Advisors LLC
Fears in Iraq
Several basic fears dominate any discussion of Iraq
“Iran’s Secret Plan for Mayhem”
1. “Iran will interfere and take over.”
(New York Sun, Jan 3, 2007)
“Iran Eyes Spiritual Leadership of Iraq’s
Shiites”
(Associated Press, April 5, 2012)
2. “Maliki is a dictator.”
“Iraq’s Leader Becoming New Dictator,
Deputy Warns”
(CNN, December 13, 2011)
3. “The Kurds will secede.”
“Iraq Risks Return to Dictatorship, Kurdish
Leader Says”
(Bloomberg, April 5, 2012)
“Iraqi Kurd Leader Hints at Secession”
(Associated Press, April 25, 2012)
4. “There will be a civil war.”
“Iraq ‘Could Break Up’ Warns Vice President”
(BBC, April 19, 2012)
“How to Save Iraq from Civil War”
(New York Times, Dec 27, 2011)
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Confidential: Euphrates Advisors LLC
We Have Seen This Before
Similar fears appeared in markets throughout history. They often mark the early
days of historic rallies
Fears that Dominate Markets Before Historic Rallies
(and that Dominate Iraq Now)
1. Foreign invasion or meddling
2. Rise of a dictator
3. Chaos and widespread civil unrest
4. Regional secession
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Lessons from History
Post-War Italy
Confidential: Euphrates Advisors LLC
Riots, assassinations, political crises and resurgent Communists did not derail the
Italian rally in the 1950’s
Italian Stock Index (USD)
900
800
“Riots Sweep Italy After Assassin Wounds Togliatti”
The New York Times (July 15, 1948)
700
600
“Political Crisis Deepens in Italy.
Situation Is Most Confused Since War”
500
The New York Times (February 1, 1954)
400
“Premier of Italy Curbs Red Press”
“Mobs Fight Police in New Rome
Riots on Trieste Issue”
300
The New York Times (May 9, 1954)
+898%
The New York Times (March 26, 1952)
200
100
0
01/31/1945
08/31/1947
02/28/1950
Source: Global Financial Data, Euphrates Advisors Research.
08/31/1952
02/28/1955
08/31/1957
02/29/1960
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Lessons from History
Post-War Germany
Confidential: Euphrates Advisors LLC
Riots and resurgent Nazis and Communists presaged a 2,800% rally in German
equities
Germany DAX Composite Index (USD)
80
“U.S. Soldiers Rout Stuttgart Rioters”
New York Times (October 29, 1948)
70
60
50
“Nazis Said to Get Posts”
+2,848%
New York Times (January 15, 1949)
40
“30,000 German Reds Riot”
30
New York Times (May 12, 1952)
20
10
0
08/31/1948
12/31/1951
Source: Global Financial Data, Euphrates Advisors Research.
04/30/1955
08/31/1958
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Lessons from History
South Korea
Confidential: Euphrates Advisors LLC
South Korea was plagued by massive social unrest and martial law as stocks rallied
0.5
Korea Stock Price Index (KOSPI) (USD, log scale)
“S. Korea Calls State of Emergency”
Chicago Tribune (December 6, 1971)
0.25
“South Korea Chief Orders Martial Law”
“Riots Rage in 7 South Korea
Cities”
Chicago Tribune (December 6, 1971)
Washington Post (June 5, 1964)
0.125
“Korea Student Riots Rooted in
Question of Police Power”
Washington Post (June 17, 1967)
0.0625
+1,394%
0.03125
0.015625
Jan-64
Jan-66
Jan-68
Source: Global Financial Data, Euphrates Advisors Research.
Jan-70
Jan-72
Jan-74
Jan-76
Jan-78
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Lessons from History
Malaysia (1970’s)
Confidential: Euphrates Advisors LLC
Radical Islam, assassinations and regional insurgencies did not prevent the
Malaysian index from rising 900% in an otherwise terrible decade for most indices
Malaysia KLSE Industrials Index (USD)
350
“Emergency Panel Rules in Malaysia”
300
The New York Times (May 17, 1969)
250
“Deputy Chief Seizes Power
In Malaysia”
“Malaysia’s Top Policeman Shot to
Death in His Car”
Chicago Tribune (May 17, 1969)
The New York Times (June 7, 1974)
200
“New Violence Breaks
Out in Malay City”
“Islam Growing Fastest in a Malaysian State;
Charges of Pressure to Convert Are Heard”
The Sun(May 26, 1969)
150
100
The New York Times (September 18,1974)
“Reds in Malaysia
Increase Terrorism”
The New York Times
(April 26, 1970)
+909%
50
12/31/1969
08/31/1971
04/30/1973
12/31/1974
Source: Global Financial Data, Euphrates Advisors Research.
08/31/1976
04/30/1978
12/31/1979
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The Security Situation in Context
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)
120
102.3
100
86.9
80
60
48.8
42.9
40
32.2
30.7
23.8
22.9
16.5
20
0
2006
(Civil War)
2007
(Civil War)
2008
2009
18.4
12.8
12.6
13.6
2010
2011
2012
2013
Average PostRussia
Civil War Iraq (1997-2008)
(2008-13)
Brazil
(2000-08)
South Africa
(2000-08)
Colombia
(2000-08)
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.
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Significant Regional Differences
Moreover, security in Iraq varies significantly across regions
Civilian Deaths from Violence in Iraq (by region)
(August 2013 - January 2014)
4,000
3,741
3,000
2,000
Community Organizing in the South: Billboard in
Basra showing al-Qaeda members and highlighting
local progress in the fight against terrorism
1,000
881
401
82
0
Central
North
Source: Iraq Body Count; U.S. Embassy Baghdad; Euphrates Advisors Research.
West
South
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Iraq’s Scalable Economy
Rashid Street, Baghdad
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GDP Growth
Increased oil production (and exports) is driving Iraq’s exceptional GDP growth
Iraq GDP
(Nominal, Billions US$)
$300
$250
$239
$213
$200
$222
$181
$150
$136
$132
$112
$100
$89
$65
$50
$37
$26
$2004
Source: World Bank.
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014e
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GDP Growth in Context
Iraq had the highest cumulative GDP growth in the world since 2004, a process
which had a material impact on the relative size of its economy
800%
Cumulative GDP Growth (Real)
724%
674%
700%
(2004-2012)
600%
477%
500%
416%
400%
393%
367% 358%
329% 326% 325%
280%
300%
200%
258% 242% 241% 240% 239%
237% 226% 217% 216%
212% 210% 209% 208% 199%
Source: Central Bank of Iraq, IMF, Euphrates Advisors Research.
Nigeria
Bolivia
Georgia
Argentina
Vietnam
Colombia
Paraguay
Egypt
Tajikistan
Brazil
Rwanda
Russia
Indonesia
Uruguay
Zambia
Uzbekistan
China
Ethiopia
Ghana
Kazakhstan
Turkmenistan
Mongolia
Angola
Azerbaijan
0%
Iraq
100%
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Equity Market Disconnect
Iraq’s equity market has not kept pace with the country’s exceptional GDP growth
Number of Companies Listed on
the ISX
GDP of Iraq
(Nominal, Billions US$)
$250
100
$222
85
$200
85
0%
$150
+500%
50
$100
$50
$37
$0
0
2005
Source: World Bank, ISX
2013
2005
2013
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The Iraqi Market in Context
Iraq’s equity market pales in comparison with its emerging market peers
Number of Listed Equities (2014)
600
572
Number of Companies with at Least $3
Million in Annual Profit (2014)
160
141
140
500
120
400
99
100
302
300
80
65
60
193
200
40
85
100
21
20
0
0
Pakistan
Source: Bloomberg, ISX
Vietnam
Nigeria
Iraq
Pakistan
Vietnam
Nigeria
Iraq
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The Iraqi Market in Context
Iraq’s equity market pales in comparison with its emerging market peers
Market Capitalization of National Stock
Exchanges
90
80
(Based on Broad Market Indices)
(Billions US$)
Market Capitalization of National
Exchange as % of GDP
35%
$77
30.4%
30%
$72
27.9%
70
25%
60
50
24.6%
20%
$46
40
15%
30
10%
20
5.7%
$10
10
4.2%
5%
0%
0
Nigeria
Pakistan
Source: IMF, World Bank, Bloomberg, ISX.
Vietnam
Iraq
Pakistan Vietnam Nigeria
Iraq
(2005)
Iraq
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Iraq’s Potential Growth
Pakistan’s experience over the last 14 years highlights the potential growth Iraq’s
equity market could undergo with the proper market structure
Karachi All-Share Index (USD)
260
210
160
+1,929%
110
60
10
Apr-00
Apr-02
Apr-04
Source: Bloomberg, Euphrates Advisors Research.
Apr-06
Apr-08
Apr-10
Apr-12
Apr-14
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Recommendations
Incentives to List on ISX
• 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
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Recommendations
Modernize Market Procedures
• 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
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Recommendations
Custody
• 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
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Recommendations
Build an Equity Culture
• 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 Advisors
80 Broad Street
Fifth Floor
New York, NY 10004
Tel: (212) 837-7727
www.euph.com
[email protected]
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