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.