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At the end of last month the Egyptian investment bank EFG-Hermes announced that it would begin offering equity swaps on ISX-listed shares to institutional investors. (See this story.) This new product has the potential to bring about a dramatic increase in foreign participation in the Iraqi stock market.
An equity swap allows an investor to earn the return on the underlying name without actually owning any shares. The issuer of the swap mimics the performance of the stock by doing trades in its own account that parallel clients’ buy and sell orders while simultaneously debiting or crediting their cash accounts by the corresponding settlement amounts.
Swaps have three main advantages. First, they replace local counterparty risk with that of the issuer. Second, they eliminate the need for a custodian bank. Third, they can greatly simplify the investor’s back office and audit work.
In a market like Iraq, these are all important considerations. Many foreign institutions will be unwilling to accept the risk of dealing directly with Iraqi brokers. So far no one is offering custody services for ISX-listed shares, which means that many funds cannot invest at all. (See this post for more on custodian banks.) And even when the Iraq Securities Commission finally gets around to issuing custodian banking licenses many investors are still going to find dealing with EFG-Hermes to be a lot less trouble administratively.
In fact, even in markets like the UAE, Qatar, and Kuwait—all of which have custodian banks—many foreign investors continue to prefer swaps solely for the sake of ease of settlement and execution.
The lack of a custodian for ISX-listed shares is suddenly starting to look like a red herring. Institutions no longer need to wait for this problem to be sorted out. Now they can start trading in the time it takes their own legal and compliance departments to review the EFG-Hermes swap agreement. (This is a non-ISDA document so this process may take a bit longer than it otherwise would.) Some may be ready to take the new shortcut to Iraq as early as the end of this month.
Article source: http://www.iraq-businessnews.com/2012/03/14/efg-hermes-offers-isx-shortcut/
Long-term investors in many Iraq-focused oil companies have had their patience amply rewarded, as shares in companies such as Gulf Keystone Petroleum (GKP) and DNO have registered significant gains.
Tony Hayward, CEO of Genel Energy, puts this down in part to ExxonMobil‘s entry into Kurdistan, which has highlighted the opportunities in the region. So much so, in fact, that he now regards GKP and DNO as overpriced.
Outside fo the direct oil sector, Egypt’s Orascom Construction has also hit new recent highs following its contract win in Baiji.
It’s a different story for Iraq’s indigenous quoted companies, however, which are down about 11% on average year-to-date, but as Mark deWeaver writes there are some technical factors that could cause that fall to correct itself rapidly.
Whether your business is domestic or foreign, Upper Quartile and AAIB are here to help you. For more information please contact Gavin Jones or Adrian Shaw.
Article source: http://www.iraq-businessnews.com/2012/03/01/iraq-will-a-rising-tide-lift-all-boats/
Bloomberg reports that EFG-Hermes Holding SAE, the biggest publicly traded Arab investment bank, started offering an equity-swap product linked to Iraqi securities.
This potentially allows investors to benefit from the nation’s economic growth, which the World Bank estimates at 12.6% in 2012.
“Despite the prevailing risk-averse nature of investment in the Middle East and North Africa region, we have seen a high level of demand for access to this new frontier market,” said Julian Bruce, the Dubai-based director of institutional sales trading at EFG-Hermes.
The Iraq Stock Exchange’s ISX Index advanced 17 percent last year, according to data on the bourse’s website. The MSCI Emerging Europe, Middle East and Africa Index dropped 23 percent in the period. The Iraq index, comprising 87 companies, had a market value of 4,930 billion Iraqi dinars ($4.2 billion) at the end of 2011. Foreign investors bought shares valued at $147 million last year compared with $52 million in 2010.
Equity swaps are an echange of cash flows between two parties that allows each party to diversify its income, while still holding its original assets. They also allow large institutions to hedge specific assets or positions in their portfolios.
The product will remove “both the domestic Iraqi broker counter-party risk and the labor-intensive procedures involved in domestic execution,” added Bruce.
(Source: Bloomberg)
Article source: http://www.iraq-businessnews.com/2012/02/28/efg-hermes-offers-iraq-equity-swaps/
So far this year Iraqi stocks have been surprisingly oblivious to three very bullish developments. The Iraq Securities Commission has finally issued its instruction on custodian bank licenses. (See this post for more on custodian banks.) The European Central Bank (ECB) is running its printing presses at maximum capacity. And earnings are up sharply at the ISX-listed banks.
The implications for foreign investment inflows are obvious. A solution to the custody problem will make it technically possible for more conservatively run institutions to invest. The ECB’s efforts will provide them with the necessary funds. And the rise in bank profits will make it easier for them to convince themselves that stocks are cheap on a valuation basis.
Yet the Rabee Securities index is down about 11% YTD and there has been no appreciable increase in trading volumes.
Either there is some hidden problem or local investors simply don’t believe that more foreigners are really coming. I think the latter is more likely. All this bullish news will only move the market if it convinces someone to front-run potential new money. Otherwise, the market isn’t going to go up until this money actually starts coming in.
In an efficient market you might expect prices to go up gradually in anticipation of such an event. When the moment finally arrived, there might not be that much upside left. But emerging markets don’t work this way. The adjustment will happen all at once, quite a while after anyone should have been able to see what was coming. The trick is not to cash in your chips before this happens.
Article source: http://www.iraq-businessnews.com/2012/02/29/isx-teaches-lesson-in-patience/
Foreign net buying of ISX-listed shares has been waning since the middle of last year. After rising from about IQD 900 million for all of 2010, average weekly net buying by non-Iraqis rose to over IQD 4 billion in the first half of last year but then declined to about IQD 2.8 billion in the second half. As of January 20, the year-to-date average is negative IQD 111 million.
You might think that foreigners are being scared away by the political situation. The chart tells a different story, however. The current drama in Parliament only really started in December. That was almost six months after the foreign net buying peak in early June.
The foreign pullback actually corresponds more closely to the drop in world markets occasioned by the start of the European crisis last summer. It is also noteworthy that the record IQD 17.2 billion in net foreign selling during the week of October 21 occurred just two weeks after the SP 500 hit its low for the year.
Perhaps all that really matters for foreign inflows is the likelihood of another global financial meltdown. Too bad that scenario is still not really “off the table.”
Article source: http://www.iraq-businessnews.com/2012/01/24/debt-crisis-hits-isx-inflows/
Since 2007, the Rabee Securities RSISX index has ended on a down note every year except 2010. (See chart.) In 2007, 2008, and 2009, the index peaked in July, August, and November, respectively, subsequently falling 27%, 7%, and 9% from those peaks to the respective year-end closes. 2010 was exceptional because the new government was formed in October but so far this year the pattern appears to be recurring. Since peaking on October 4, the RSISX is already down 18% (as of November 14).
The timing of these declines might be due to chance. After all, four years of data isn’t much to go on. On the other hand, however, there may be a real phenomenon here resulting from the way that Iraqi capital increases are done.
Typically, capital increases seem to be more common in the first half of the year, occurring around the time that full-year financials for the preceding year become available. Generally the shares will be suspended before there is enough time for holders of large positions to sell, which means that they will be stuck with whatever new share issues are announced at the shareholders meetings.
Investors are thus likely to end up with bigger positions than they would ideally like and will be unable to get out of them until the suspension periods end. Since suspensions go on for a quite a few months, the first chance they will get to rebalance their portfolios is bound to be some time in the second half.
Could the year-end jinx just be a matter of investors dumping unwanted new shares as suspended companies resume trading?
Article source: http://www.iraq-businessnews.com/2011/11/15/an-isx-year-end-jinx/
Foreign investors’ appetite for Iraq’s stock market is rising before planned IPOs by the country’s three mobile telephone operators, but the fledgling market’s small size means it may struggle to cope with the listings, according to a report from Gulf News.
The Iraq Stock Exchange (ISX) is an outpost of private sector business in Iraq, which is still dominated by state-run firms. Market capitalisation of the bourse, which started operating in 2004, is about $4bn with average daily trading value only around $2.8mn.
Successful stock market listings of the three mobile phone firms, Asiacell, Korek and Zain Iraq—a requirement of their operating licences—would be seen as a triumph for Iraq’s effort to create a diversified economy and a sign that it was establishing a stable development path after years of conflict.
The listings could also trigger a fresh wave of foreign interest in the market, which currently is heavily weighted towards banks, accompanied by a range of industrial, insurance, hotel and agriculture firms.
ISX chief executive Taha A Abdulsalam has said he expects the initial public offers of shares to double the market’s capitalisation. But with fewer than half of the 85 listed stocks active daily, such a boost in value could destabilise the market.
“The IPOs, first of all, they should put it in the market gradually,” Iraq Communications Minister Mohammed Allawi told Reuters. “If you put all the shares, the price will collapse for sure.”
Taking the companies public will not be an easy task, however. The companies themselves have been reluctant to move quickly until the stock market is more developed and they can be sure of getting good prices for their shares.
Zain Iraq, a unit of Kuwait’s Zain, Asiacell, an affiliate of Qatar Telecom and Korek, part-owned by France Telecom SA and Kuwait’s Agility, all missed an initial August 31 deadline set by the CMC for their listings, which now look likely to go ahead sometime next year.
Article source: http://www.iraq-businessnews.com/2011/11/09/iraq-bourse-faces-challenge-in-listing-telecom-firms/
According to a report from Reuters, with better regulation and the expected listing of the country’s three main mobile phone firms, foreign investors are increasingly choosing Iraq’s stock market as a lucrative investment.
Iraq’s bourse is still tiny in comparison with other regional or international stock markets, but a drop in violence since the peak of sectarian fighting in 2006-2007 and the scope for quick growth is lifting interest.
Taha Abdulsalam, chief executive of the Iraq Stock Exchange (ISX), recently announced that the volume of shares traded through Sept. 30 this year was $495 million compared with $337 million in full-year 2010.
The ISX, which started operating in 2004 and currently has 86 listed firms, is one outpost of private investment outside of the oil industry in a country still dominated by state firms.
The number of shares foreign investors bought through to end-Sept. this year was 66 billion, valued at $110 million, Abdulsalam said. Foreign trading was almost non-existent a few years ago.
Russian-based 55 North Company is a bold example of foreign appetite in the ISX.
The firm plans to establish an investment fund worth $25 million, its managing director Paul Collison said, the maximum it can invest right now due to the low level of liquidity in Iraq’s stock market.
“It is important to start early on… it is a fantastic opportunity for a small fund to get established,” he said.
Panu Saukkonen, a senior partner at Finnish Virtus Capital Oy Company which started investing in the Iraqi bourse three years ago, said Iraq was a great choice to invest in as there is no serious competition and market values are still low.
The three mobile phone operators, Asiacell, Korek Telecom, and Zain Iraq, are required by the terms to their licences to list shares on the local bourse, and this could see the ISX’s current market capitalisation of $4 billion double, Abdulsalam told Reuters last week. .
Oliver Emanuel, executive director of Middle East and North Africa sales and trading at Morgan Stanley, said the initial public offerings by Iraq’s mobile phone firms would give a great boost to the local market.
“The upcoming telecom IPOs will no doubt act as a catalyst for the Iraq stock market precipitating greater focus by international and regional investors, helping improve liquidity,” Emanuel said.
Investors said the implementation of some regulations such as custodian bank services and share trading settlement could further open the market for more foreign capital.
A share trading settlement would allow non-Iraqi investors up to two days to arrange their payment after making a trade, compared with currently having to pay before conducting a trade.
Saukkonen said having a custodian bank could boost its investment by at least 10 times within three years.
The head of the Iraqi Securities Commission (ISC), Abdulrazaq al-Saadi, said custodian regulation would be issued in November.
The ISX moved from manual to automated trading in 2009 and is open for trading for two hours a day, five days a week. Each trade takes around 8 seconds to process.
The banking sector is the largest on the bourse, which also lists industrial, insurance, hotel and agriculture firms.
Collison said he expected the ISX to grow quickly once an international bank takes on the custodian role but said the market would need to be closely monitored.
“The risk is you get a very quick bubble and it will lose 50 percent and that is exactly what happened in places like Russia,” said Collison.
(Source: Reuters)
Article source: http://www.iraq-businessnews.com/2011/10/24/foreigners-invest-in-iraqs-bourse-expect-boom/
The Warka Bank shareholders meeting originally scheduled for October 6 was held last Wednesday (Oct 12). From what I have heard from various sources, there was some good news and some bad news.
The good news is that the bank will be getting an IQD 100 bn loan from the Central Bank of Iraq (CBI). This will make it possible for the Registrar and the Securities Commission to allow BWAI to resume trading.
The Registrar’s approval is necessary because it has a lien on the shares. As long as this is in place, transfer of ownership is blocked. The existence of this lien was made public in a recent communication from the CBI posted on the Iraq Stock Exchange (ISX) website. The central bank, in response to a question from the ISX regarding Warka’s status, stated that the Registrar had blocked trading in the shares but did not say why.
Normally a lien might be put on someone’s property if title was in question or if the property had been posted as collateral. It’s hard to see what the rationale could be in this case. Why freeze the assets of all the minority shareholders?
The bad news is the same as the good news: Warka will be getting IQD 100 bn from the CBI. Evidently the potential deal with Standard Chartered, which would presumably have seen the British bank taking up almost IQD 150 bn in rights issue shares, is not going to be finalized in the near future. (There’s more on the Standard Chartered story here.)
My earlier expectation of a big jump in BWAI’s share price on the resumption of trading now seems likely to be disappointed.
Article source: http://www.iraq-businessnews.com/2011/10/19/warka%E2%80%99s-good-news-is-bad-news/
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