By Mark DeWeaver.
This hasn’t been a particularly good year for Iraqi stocks. So far the Rabee Securities Index (RSISX) is down 3% year-to-date and off 8% from its recent high on January 28. The ISX index has been dropping all year. It’s now down 5% year-to-date.
Uncertainty in the run up to Iraq’s April 30 parliamentary elections seems to be the most obvious explanation for this downturn. Market participants may well be expecting a repeat of the last elections, on March 7, 2010, after which the government formation process lasted until November 11. That year the RSISX was already down 12% from its November, 2009 pre-election peak by election day. It fell a further 8% before finally rebounding in October. (See chart.) Investors could hardly be blamed for getting cold feet this time around.
But this year is unlikely to be a rerun of 2010 for three reasons. First, Iraqi oil production is set to jump sharply. This should lead to strong growth in the money supply—always a positive for asset prices. Second, bank capital increases will be less of an overhang than they were four years ago as many banks have already met the central bank’s final capitalization target of IQD 250 bn. Finally, there isn’t really that much uncertainty about the outcome of the election. Presumably some compromise will once again be reached after a protracted period of government formation. The situation will continue to be bad but there is no reason to expect it to get worse.
This time, look for Iraq’s strong economic fundamentals, rather than its fractious politics, to be the main driver for stocks.