How has the Iraqi market changed over the three years that youve been traveling and investing there?
Two years ago volumes were around $1 million a day at best; today theyre up around $3 million or $4 million. Before you couldnt get live pricing; today thats changed. Every time weve traveled through Iraq over the past two years, weve had confirmation that at the ground level things are doing incredibly well. Theres a major disconnect between what the press is writing about Iraq the car bombs, the sectarian violence and whats really happening on the ground. Probably the biggest disconnect is whats happening at the micro, earnings level with companies in Iraq. The banking sector is about 40 percent of the stock market today; if you look at the 15 banks that are listed, five of them had cumulative earnings growth between 2010 and 2012 in excess of 400 percent. Theres also very little brokerage coverage in Iraq and very little institutional activity. The explosive growth in these companies is still relatively underreported.
Is there much room to move beyond this initial growth spurt?
The earnings are coming off a low base, but market-cap-to-GDP in Iraq is still 8 or 9 percent. Thats well below other countries in the region. Across the Middle East the ratio is probably closer to 55 percent. So theres a lot of room to move there. And lots of the companies are hugely undervalued. Take Iraqi Middle East Investment Bank. In many other emerging markets, a lot of the very fast-growing banks trade at 20, 30 times earnings. Here you have a bank that trades at 4 times earnings. Theres huge catch-up potential. People were storing money under their mattresses during the Saddam Hussein era, and now that money is gradually creeping back into the banking sector.
Has it been difficult to gather reliable information on individual companies?
Its been a huge challenge. When we started, we had a very tough time getting conference calls. Theres no equity culture; this is not America, where executives are getting hundreds of millions of dollars in compensation based on the price of the stock. But things have changed for us. No. 1, we have an Arabic speaker on our team. Weve found cases where issues have been highlighted in the footnotes to company accounts but those issues have then been omitted from the English translation. No. 2, weve been to Iraq a few times. By coming to Baghdad weve gained a lot of respect.
When do you expect larger funds to take a more active interest in Iraq?
The biggest impediment to foreign funds coming in is the lack of a global custodial service. The HSBCs and Standard Chartereds of the world coming in would give a lot of confidence to some of the big investors. But [the banks] will only come in once theres a big wave of demand, so its kind of a chicken-and-egg scenario. That provides people like us who are already in Iraq with a phenomenal opportunity. The market will undoubtedly go up once the big custodial services get here. The markets not very liquid; its not possible to allocate significant sums of money without having a significant impact on the price of the stock.
How much of a concern is security?
When theres a bomb, I dont rush to the phone and tell my broker to sell the stock. If anything, Im more inclined to buy. Even when its a very bad bomb blast, the market generally has zero correlation with [the security situation]. Were in the market for the long run, and I imagine many of the other people who are here right now have a similar opinion. The CNN effect is so persuasive that most foreign investors who call Iraqi companies spend most of the call talking about car bombs. But if Im sitting in the same room with the executives in Baghdad, I dont spend an hour saying, Ooh, what do you think about the latest car bomb? Its irrelevant. You talk about the fundamentals and the performance of the company instead. And they give you a huge amount of respect because of that.