AFC Iraq Fund Investment Strategy
The AFC Iraq Fund is designed to offer investors returns which have a low correlation with global, emerging & frontier markets to provide a significant diversification opportunity for investor portfolios. The fund's investable universe consists of locally listed companies that have their principal business activities in Iraq as well as foreign listed companies that have the majority of the business in Iraq as a whole including the Kurdish Region of Iraq (KRI).
The AFC Iraq Fund offers investors the opportunity to capture the post conflict recovery potential of Iraq, including the KRI, and/or the return of stability in its territory. As well as this the fund aims to capture returns linked to the resource-based upside derived from improvements in the overall economy which will see significant benefits in the next commodity cycle upswing. The fund aims to achieve long-term capital appreciation for investors by capturing value in growth companies over the next 7-10 years predominantly targeting companies leveraged to Iraq’s post conflict recovery and growth trajectory.
Iraq offers a compelling growth story as a young and attractively valued market that has significant room to grow. The development of the domestic economy has been held back by over 40 year of wars, sanctions, civil strife, the ISIS occupation and resulting war ending in 2017, nationwide demonstrations demanding political reform and services, culminating in the disruptions brought by COVID-19. The country could benefit significantly from post-crises recovery as stability offers individuals and businesses the opportunity to work, employ and spend which will drive domestic consumption and investment. Equity markets in post conflict Sri Lanka saw a rally of +250% in the 18 months after the end of the civil war even without the significant resources to rebuild that Iraq has on offer. Other post conflict country stock markets have also seen significant rallies to more than double in the two years after the end of the conflict.
Whilst there are many conflict countries that benefit from peace dividends Iraq is unique in that it has such significant oil wealth already at its disposal. Iraq presently holds approximately 9% of proven world oil reserves which could potentially rise to as much as 15% as further oil fields are explored and developed. From a macroeconomic perspective the country has a large, young, rapidly growing population with rising incomes that will continue to increase as investment in the oil industry and higher exports support domestic consumption.
Whilst the long-term story is appealing, the market entry point for investors at this present time is attractive given the current investment environment. The fund presents an opportunity to capture attractively valued assets that are depressed in the wake a brutal bear market that saw the equity market, as measured by the Rabee Securities RSISX USD Index (RSISUSD), decline by about 75% from the January 2014 peak to the recent lows of March 2020.
The underlying fundamentals for Iraq are strong and the implementation of economic reforms induced by the disruptions brought by the COVID-19 pandemic can have a significant positive impact on the domestic market in the next economic cycle.
The fund is positioned to capture the opportunities of post-crisis Iraq, and is focused on sectors leveraged to oil production, capital spending, GDP growth and consumer emergence as capital expenditure to drive oil exports which together will drive GDP growth and empower a young growing population with high rising incomes. The fund targeted first beneficiaries from this wave including companies in banking, telecom, consumer spending, and energy.