Foreign net buying of ISX-listed shares has been waning since the middle of last year. After rising from about IQD 900 million for all of 2010, average weekly net buying by non-Iraqis rose to over IQD 4 billion in the first half of last year but then declined to about IQD 2.8 billion in the second half. As of January 20, the year-to-date average is negative IQD 111 million.

You might think that foreigners are being scared away by the political situation. The chart tells a different story, however. The current drama in Parliament only really started in December. That was almost six months after the foreign net buying peak in early June.

The foreign pullback actually corresponds more closely to the drop in world markets occasioned by the start of the European crisis last summer. It is also noteworthy that the record IQD 17.2 billion in net foreign selling during the week of October 21 occurred just two weeks after the S&P 500 hit its low for the year.

Perhaps all that really matters for foreign inflows is the likelihood of another global financial meltdown. Too bad that scenario is still not really “off the table.”

Since 2007, the Rabee Securities RSISX index has ended on a down note every year except 2010. (See chart.) In 2007, 2008, and 2009, the index peaked in July, August, and November, respectively, subsequently falling 27%, 7%, and 9% from those peaks to the respective year-end closes. 2010 was exceptional because the new government was formed in October but so far this year the pattern appears to be recurring. Since peaking on October 4, the RSISX is already down 18% (as of November 14).

The timing of these declines might be due to chance. After all, four years of data isn’t much to go on. On the other hand, however, there may be a real phenomenon here resulting from the way that Iraqi capital increases are done.

Typically, capital increases seem to be more common in the first half of the year, occurring around the time that full-year financials for the preceding year become available. Generally the shares will be suspended before there is enough time for holders of large positions to sell, which means that they will be stuck with whatever new share issues are announced at the shareholders meetings.

Investors are thus likely to end up with bigger positions than they would ideally like and will be unable to get out of them until the suspension periods end. Since suspensions go on for a quite a few months, the first chance they will get to rebalance their portfolios is bound to be some time in the second half.

Could the year-end jinx just be a matter of investors dumping unwanted new shares as suspended companies resume trading?

According to a report from Reuters, with better regulation and the expected listing of the country’s three main mobile phone firms, foreign investors are increasingly choosing Iraq’s stock market as a lucrative investment.

Iraq’s bourse is still tiny in comparison with other regional or international stock markets, but a drop in violence since the peak of sectarian fighting in 2006-2007 and the scope for quick growth is lifting interest.

Taha Abdulsalam, chief executive of the Iraq Stock Exchange (ISX), recently announced that the volume of shares traded through Sept. 30 this year was $495 million compared with $337 million in full-year 2010.

The ISX, which started operating in 2004 and currently has 86 listed firms, is one outpost of private investment outside of the oil industry in a country still dominated by state firms.

The number of shares foreign investors bought through to end-Sept. this year was 66 billion, valued at $110 million, Abdulsalam said. Foreign trading was almost non-existent a few years ago.

Russian-based 55 North Company is a bold example of foreign appetite in the ISX.

The firm plans to establish an investment fund worth $25 million, its managing director Paul Collison said, the maximum it can invest right now due to the low level of liquidity in Iraq’s stock market.

“It is important to start early on… it is a fantastic opportunity for a small fund to get established,” he said.

Panu Saukkonen, a senior partner at Finnish Virtus Capital Oy Company which started investing in the Iraqi bourse three years ago, said Iraq was a great choice to invest in as there is no serious competition and market values are still low.

The three mobile phone operators, Asiacell, Korek Telecom, and Zain Iraq, are required by the terms to their licences to list shares on the local bourse, and this could see the ISX’s current market capitalisation of $4 billion double, Abdulsalam told Reuters last week. .

Oliver Emanuel, executive director of Middle East and North Africa sales and trading at Morgan Stanley, said the initial public offerings by Iraq’s mobile phone firms would give a great boost to the local market.

“The upcoming telecom IPOs will no doubt act as a catalyst for the Iraq stock market precipitating greater focus by international and regional investors, helping improve liquidity,” Emanuel said.

Investors said the implementation of some regulations such as custodian bank services and share trading settlement could further open the market for more foreign capital.

A share trading settlement would allow non-Iraqi investors up to two days to arrange their payment after making a trade, compared with currently having to pay before conducting a trade.

Saukkonen said having a custodian bank could boost its investment by at least 10 times within three years.

The head of the Iraqi Securities Commission (ISC), Abdulrazaq al-Saadi, said custodian regulation would be issued in November.

The ISX moved from manual to automated trading in 2009 and is open for trading for two hours a day, five days a week. Each trade takes around 8 seconds to process.

The banking sector is the largest on the bourse, which also lists industrial, insurance, hotel and agriculture firms.

Collison said he expected the ISX to grow quickly once an international bank takes on the custodian role but said the market would need to be closely monitored.

“The risk is you get a very quick bubble and it will lose 50 percent and that is exactly what happened in places like Russia,” said Collison.

(Source: Reuters)

The Warka Bank shareholders meeting originally scheduled for October 6 was held last Wednesday (Oct 12). From what I have heard from various sources, there was some good news and some bad news.

The good news is that the bank will be getting an IQD 100 bn loan from the Central Bank of Iraq (CBI). This will make it possible for the Registrar and the Securities Commission to allow BWAI to resume trading.

The Registrar’s approval is necessary because it has a lien on the shares. As long as this is in place, transfer of ownership is blocked. The existence of this lien was made public in a recent communication from the CBI posted on the Iraq Stock Exchange (ISX) website. The central bank, in response to a question from the ISX regarding Warka’s status, stated that the Registrar had blocked trading in the shares but did not say why.

Normally a lien might be put on someone’s property if title was in question or if the property had been posted as collateral. It’s hard to see what the rationale could be in this case. Why freeze the assets of all the minority shareholders?

The bad news is the same as the good news: Warka will be getting IQD 100 bn from the CBI. Evidently the potential deal with Standard Chartered, which would presumably have seen the British bank taking up almost IQD 150 bn in rights issue shares, is not going to be finalized in the near future. (There’s more on the Standard Chartered story here.)

My earlier expectation of a big jump in BWAI’s share price on the resumption of trading now seems likely to be disappointed.

Iraq’s stock exchange market will double its capitalization to $8 billion once the three main mobile-phone companies operating in the country are listed, according to Taha A. Abdulsalam, chief executive of the Iraq Stock Exchange (ISX).

The three mobile phone operators, Asiacell, Korek Telecom, and Zain Iraq, are required by the terms to their licences to list shares on the local bourse.

The companies have yet to change to shareholding companies, a key requirement and the first main step towards going public on the local Iraqi bourse, but according to this report from Reuters, the regulators have given them more time to complete the process, which initially was supposed to have been done by the end of August.

On Wednesday, the head of the ISX told Reuters that the current market capitalization of the Iraqi bourse could double from $4 billion to $8 billion once the mobile companies managed to list in the coming month.

A commissioner of Iraq’s Communications and Media Commission or CMC, which regulates telecommunications in Iraq, said last week he did not expect any offerings until mid-2012.

The banking sector is the largest on the bourse, which also lists industrial, insurance, hotel and agriculture firms.

The exchange moved from manual to automated trading in 2009 and is open for trading two hours a day, five days a week. Each trade takes around 8 seconds to process.

The Iraq Stock Exchange (ISX), which started operating in 2004 and currently has 86 listed firms after Elaf Islamic Bank joined recently, is one outpost of private investment outside the oil industry in a country still dominated by state firms.

Abdulsalam said the volume of shares traded through Sept. 30 this year was $495 million compared with $337 million in full-year 2010.

(Source: Reuters)

The mobile phone operators are finally getting their IPOs [initial public offerings - A company's first offering of common stock to the public] organized. Recently Asiacell and Zain began conversions to joint stock ownership. Zain is also reported to have engaged Citibank and BNP Paribas to work on valuation. So far as I know, Korek has not been in the news but it is presumably on a similar track.

These will be enormous offerings for a market as small as the ISX. Each company is required by the conditions of its license to list 25% of its shares. Asiacell alone will have to list 67.5 bn shares. (See this post.) At par (IQD 1), that would be about US$ 58 mn and they will certainly be looking for a higher price than that. With ISX daily volume now averaging only around US$ 2 mn, the total for the three IPOs could easily be the equivalent of a year’s worth of trading.

You might think the ISX would be overwhelmed. In fact, shouldn’t the market be falling already, as people raise cash for the new issues?

Actually there’s no cause for alarm. The companies clearly will not be trying to raise hundreds of millions of US dollars from local investors. The involvement of Citi and BNP makes it obvious that the main focus will be on foreign institutions, most of which are not yet in Iraq at all.

For these investors, the key obstacle to investing in Iraqi shares is the lack of a custodian bank. (See this post for more on the custody problem.) But this will be easy to fix. According to the Word Bank’s Republic of Iraq Financial Sector Review (p. 54), “a major international bank” [i.e. HSBC] has already made the necessary preparations to provide custody services and is just “waiting for the necessary licenses to be granted.” (There’s a link to the World Bank report here.)

The real significance of the IPOs is that they can provide the stimulus necessary to get those licenses issued. That, in turn, will allow a host of new foreign investors, potentially commanding far greater amounts of capital than the telcos will be raising, to get into the market. This portends not so much a flood of new shares as a deluge of new money.

Image by Angela See. Used by permission.

With most Middle East stock markets having been dragged down by the turmoil unleashed by the Arab spring and a sputtering global economy, some adventurous fund managers have started exploring opportunities in the tiny Iraqi market, according to a report from Bloomberg.

The Iraqi Stock Exchange, or ISX, says its main market index has surged some 65% so far this year, making it one of the world’s best-performing markets. Though many doubt the accuracy of the ISX’s main index, fund managers who follow the country agree that Iraqi share prices have risen about 15% in 2011—still outperforming most global peers.

Investors have been attracted by the relative political stability following the formation of Prime Minister Nouri al-Maliki’s coalition government last year, as well as the promise of higher oil revenues and the reconstruction of the economy. The International Monetary Fund estimates that Iraq’s economy will grow at 9.6% this year and likely expand by 12.6% in 2012.

“Foreign buying has picked up in the past 18 months or so with inflows estimated at about $130 million in this period,” said Shwan Ibrahim Taha, chief executive of Rabee Securities, whose weekly stock market reports are published by Iraq Business News.

“The fact that it is one of the best performing markets this year, with further potential upside as the economy develops, is definitely whetting investor appetite,” he said.

The Iraqi bourse’s gains this year compare well to the performance of other indices in the region. Saudi Arabia, the Middle East’s biggest market, is down some 7% so far this year. Egypt, the most open market in the region, has dropped 38% in the wake of the January revolution that toppled former President Hosni Mubarak.

Asiacell has launched what may be the world’s smallest ever public offering, raising about US$ 8,500 through the sale of 10,000,000 shares at IQD 1 each. The subscription period started on September 14 at the Baghdad and Sulaimaniya branches of Al-Shamal Finance and Investment Bank and will continue for up to sixty days.

Obviously this is not the long awaited IPO called for by the conditions of the company’s operating license. That would require the sale of a 25% stake. With share capital of 270 bn, Asiacell would have to be selling 67.5 bn shares.

The current micro-offering is merely a preliminary step to convert the company to joint-stock status. I don’t know why this couldn’t be taken care of as part of the actual IPO. My guess, for whatever it’s worth, is that the existing shareholders might otherwise have to do the entire offering at par (IQD 1).

As I understand it, the Company Law (Article 154), requires new shares to be issued when a company converts to joint stock form but does not allow for these to be sold for more than their IQD 1 par value. Once the conversion has happened, however, Article 55/4 says that new shares “may be offered at a price equal to or greater than their nominal value…and priced in light of the company’s performance.”

If I’m right, two separate offerings would make sense. In the first, you try to set the record for world’s smallest IPO, selling only a tiny number of shares at par. Then you do the real IPO, selling the shares for what they are actually worth.