For
the last decade, Iraq has been afflicted by economic instability, war, and
political uncertainty. Today, a
new era is dawning in Iraq as the country begins to rebuild and remake
itself. Much like Russia in the
early 1990s, modern Iraq is in its infancy. Russia seemed off limits to savvy investors for its
similarly unpredictable investment environment. Despite an occasionally bumpy transition, the RTS index has
risen ten-fold since the mid 1990s.
There
is good reason to believe Iraq can imitate Russia’s success. It is expected to be one of the fasted
growing economies for the next several years in terms of GDP. The Iraqi Stock Exchange (ISX) remains
one of the most undercapitalized in the region. Several expected IPOS on the ISX promise to increase total
market capitalization as early as this year. Investors willing to bear some risk are now faced with a
very similar opportunity to invest in the early stages of a resource rich
country’s modernization.
A
good part of Iraq’s growth story will come about through its underdeveloped oil
reserves. Decades of conflict have
left Iraq with as little as ten percent of its oil reserves explored. It is estimated that Iraq’s total reserves
match those of Russia and Saudi Arabia though the total stock of market
capitalization only 1% of these two counties. This underdevelopment offers a window of opportunity for
investors to get in early and ride the wave of market capitalization once
Iraq’s known oil reserves are effectively exploited. The process of putting these vast reserves to work has
already begun as revenues from oil production have recently begun to rise.
Investing
in Iraq is a long-term investment.
Interested investors should have a 3-5 year horizon on their investment and
recognize the nature of their investment. Investments will seek to benefit from Iraq’s general
economic development, the growth of the ISX, and the development of its large
oil reserves. Investment funds are
aided by local independent managers responsible for allocating capital in Iraq
and to foreign companies associated with Iraq. This allows a fund to be well diversified in order to hedge
against risk and more thoroughly invest in Iraq’s economic development.
Just
like the opportunity that Russia in the 1990s presented investors, Iraq has
its share of risk. Funds seek to
minimize risk by thorough diversification across sectors in the Iraqi economy
but risk is an ever-present challenge to investors in such a market. It is a well-known general observation
that risk and potential reward can be strongly correlated but investing on such
sentiment is hardly sound practice.
The Iraqi economy can be precarious, as Russia’s was during its
development, but it has nowhere to go but up. High-risk investment in Iraq is not an instance of gambling
but of recognizing the real potential the country has to develop quickly in the
new post-war environment.
Headlines about isolated violent incidents and political infighting can
and do affect the weekly fluctuations of the ISX. Such stories cannot, however, eclipse the biggest story in
post-war Iraq: development.
Off
limits to American investors, Iraq can add an important element of
high risk/return and long-term outlook to a Russian portfolio. Funds and investment products are
available to provide investors access to Iraq’s growth. Interested investors should consult
with their financial advisor about the risks and potential returns offered by
Iraq.
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