Will the ISX join the emerging markets breakout?

This hasn’t been a great year for Iraqi stocks by any stretch of the imagination. As measured by Rabee Securities’ dollar-based index, as of October 7 the market is down 10% year-to-date. And with index constituent stocks with a total weighting of something like 40% currently suspended from trading and Warka Bank (BWAI) no longer even in the index at all, the true extent of the decline could easily be over 20%.

The contrast with other emerging markets couldn’t be greater, with the Morgan Stanley Emerging Markets Index up 12% y-t-d and high-fliers like Indonesia (up 42% y-t-d), Thailand (up 32%), and Turkey (up 26%) making convincing breakouts above their 2008 highs in early September.

While many people seem to think this year’s uptrend in emerging markets is justified by positive fundamentals, it seems to me it is primarily the result of money printing by the world’s central banks—a matter of too much global liquidity chasing too few assets. If this is the case, the recent interest rate cut by the Bank of Japan and likely quantitative easing by the Federal Reserve later this year mean not only that the emerging markets rally can continue but also that it may broaden to include places that have so far underperformed.

Could Iraq be one of those places? So far there has been little sign of increased foreign investor interest in the ISX—though last week’s uptick in weekly foreign trading is of course mildly encouraging. (See chart.) This could change quickly however. It would take only a miniscule amount of money to move a market as small as Iraq’s and a handful of Iraq country funds have reportedly already been set up.

More than anything else, the outlook for the ISX for the rest of this year will probably depend on how much success these funds have in raising money, which in turn may depend to a large extent on progress in forming the next Iraqi government. As Maliki moves ever closer to securing a second term in office, an ISX breakout is thus getting a bit more likely than the market’s dismal performance so far this year might suggest.

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