ISX teaches lesson in patience

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.

11 Responses to ISX teaches lesson in patience

  1. Stew 5th March 2012 at 00:09 #

    Mark... not sure if you've seen this. I know you've written about Warka in the past.

    "Iraq’s central bank placed private bank Warka Bank under guardianship to supervise it through insolvency, a senior official in the central bank said on Sunday."

    You have any idea how this might play out for account holders. Iraq doesn't have a version of FDIC insurance do they?

  2. DeWeaver 7th March 2012 at 16:04 #

    Hi Stew: I don't think they do have anything like FDIC. I'm trying to confirm this. I'll let you know if I find out anything.

  3. DeWeaver 8th March 2012 at 03:30 #

    Hi Stew: It turns out there is no deposit insurance in Iraq. Deposits are also not guaranteed by the central bank. So it looks like the depositors' fate is going to depend on how much the bank can raise by selling assets.

  4. Stew 8th March 2012 at 05:55 #

    Thanks for the info Mark.

  5. Zpasta 9th March 2012 at 11:46 #

    Hi Guys;

    There is no FDIC in Iraq.
    Rumor has it, Warka bank was here for money laundering only.
    They have close to 200 branches listed on their books however, none of them were inside any sort of a building. They were kiosk and/or money transfer offices. Nothing like what we are used to in the west. They do not own any of their buildings and most of that money never was deposited into the back. Anyway, they either raise the capital or fold.
    It looks like they were busted.

  6. Julian 12th March 2012 at 22:06 #

    Hello Dr. DeWeaver, Thanks for the good news story. I bought shares through Warka Bank. Do you think the shares will be tied up in the Warka failure? I also bought shares through the Bank of Baghdad brokerage and feel much better about those purchases. I hope the positive market news continues and Iraqi businesses prosper to improve the lives of the people of Iraq.

  7. DeWeaver 12th March 2012 at 22:27 #

    Hi Julian: The last I heard about the Warka brokerage it had been ordered to suspend operations. (See this link. You might also want to look at some of the comments.) If this is true, shares bought through them have already been tied up for quite some time.

    I think a key question is whether the shares are registered in your name or that of the bank/brokerage. If the former, it should be possible to transfer the shares to another brokerage through the Iraq Depository Center. If the latter, it seems entirely conceivable that they will be sold and the proceeds used to pay back depositors.

  8. Stew 13th March 2012 at 01:28 #

    I saw a story the other day where the Iraqi Gov was asking the CBI to cover all Iraqi citizens' deposits.
    The key word there… “CITIZENS”

  9. DeWeaver 13th March 2012 at 19:35 #

    Hi Stew: That's interesting. Have you still got the link for that story?

  10. DeWeaver 13th March 2012 at 21:03 #

    Thanks, Stew. That's interesting news. Whatever they do is going to set an important precedent.