Iraq’s instability affects regional markets

Political instability in Iraq is affecting regional markets, but domestic issues have been causing downward pressure, says an analyst.

Sherif Salem, Portfolio Manager at Invest AD’s Iraq Opportunity Fund, says: “There aren’t many factors pushing regional markets up at the moment and so events in Iraq aren’t helping.”

Although Iraq is facing threats from ISIS, the market has a huge growth potential. “Like most emerging markets, Iraq has a huge growth potential. This is exaggerated by the fact that the market comes from such a low base. Many sectors are under-penetrated, especially banking, telecommunications and consumer goods. However, the political situation is fluid and developing so quickly, and so it’s hard to tell how it will end,” says Salem.

Stability in Iraq seems like a pipedream, for now, and one would wonder about foreign investment flows. “Investors should remember that Iraq is a big country with large foreign currency reserves and a growing population. There will always be a strong local demand for consumer goods, telecommunications and banking. Geographically, Iraq’s oil fields and export terminals are concentrated in the south, away from the conflict, and have not been affected.

“The country has been building up production capacity over the past few years and is now producing a little more than 3.2 million barrels per day. Other areas, such as Kurdistan, are also unaffected by the conflict and many of the companies we’re invested in have derived a lot of their revenues from operations there.”

Speaking about the Iraq Opportunity Fund, he says it has been negatively impacted, but is still up since inception to date. “We are concerned about the situation, but are hopeful that this is just short-term volatility. The Iraqi market is a retail-dominated market, which can be more sentiment-driven. Any changes that we have seen have been based on negative sentiment caused by headline news, rather than the impact that the situation has had on companies. Because of this, we have not been selling.”