AFC Iraq Fund Investment Strategy
The AFC Iraq Fund is designed to offer investors high 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 high return prospects by capturing the post conflict recovery potential of Iraq, including the KRI, and/or stability in its territory. As well as this the fund will 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 very 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 35 year of wars, sanctions, civil strife culminating in ISIS occupation and the ongoing war. The country will benefit significantly from post war 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. Iraq, in spite of the well documented violence since 2003, has had one the fastest growth rates in the world and is expected to have a GDP of USD 250 billion in 2018. Increasing oil exports has also supported the balance of payments leading to a stable currency for the last 2-3 years as well as increasing foreign reserves over the past few years.
Whilst the long term story is very appealing the market entry point for investors at this present time is particularly attractive given the current investment environment. The timing of this fund presents a unique opportunity as present valuations in Iraq are significantly depressed by two phenomena that we expect will not continue in the years to come; firstly the ISIS conflict and secondly the suppressed oil price. These events have caused Iraq's equity markets to undergo a severe correction which reflects the challenges present in 2015 as the country works through the issue with ISIS and the deals with implications of rebuilding their economy in the wake of these events. The underlying fundamentals for Iraq are improving and any slow down or halt to conflict will have a significant positive impact on the domestic market in the next economic cycle. Being positioned to capture the opportunities of post conflict Iraq could mean a potential increase of several hundred percent in local terms and even greater upside when coupled with extremely depressed valuations that exist at present.
The fund will focus 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. Initially the fund will target first beneficiaries from this wave including companies in banking, consumption, energy and construction.