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Fund Performance

Country Snapshot:
Iraq

Travel Notes

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Fund Performance

Leopard Asia Frontier Fund (LAFF) USD A-shares lost 1.77% in February 2013, underperforming both the MSCI Frontier Markets Asia Index (+0.4%) and the MSCI World Index USD (unchanged).

In February, indexes within the LAFF universe were mixed. Cambodia's "one stock exchange" performed best, gaining 5.6%, followed by Pakistan (+5.4%). Cambodia's stock exchange went up on the announcement of a dividend payment. In Pakistan, growth was fueled by capital inflows from foreign investors, coupled with support for continued democracy in the upcoming elections and improvements in the current account system. The worst-performing markets were Bangladesh (-4.3%) and Sri Lanka (-3.1%). Sri Lanka's bourse fell after a February announcement by the IMF that the country faces slow growth, high inflation, and low tax revenue. The top-performing portfolio stocks were a brewery in Vietnam (+29.3%), a fertilizer producer from Pakistan (+28.8%) which gained on the news that gas input prices would be reduced substantially, and a food producer from Mongolia (+23.9%).

Moving forward, LAFF will begin investing in Iraq - one of the world's fastest growing economies in 2012 with a GDP growth rate of 10.2%. We will focus our investments there on infrastructure, financial services, and consumer-related stocks.

We were not very active in February: we increased existing stock positions in Laos and Vietnam and made one switch in Sri Lanka: we sold a brewery with a profit of 50.3% since purchase and used the proceeds to take a new position in a wall tile producer.

As of February 28, the portfolio was invested in 94 shares, 1 closed-end fund (with 46.6% discount to NAV), 1 GDR (with 58% discount) and held 4.1% in cash. The two biggest stock positions are a power producer from Laos (6.2%) and a pharmaceutical company from Bangladesh (5.0%). The countries with the largest asset allocation include Vietnam (19.5%), Sri Lanka (15.2%), and Pakistan (12.6%). The sectors with the largest allocation of assets are consumer goods (41.9%) and financials (14.5%). The average trailing portfolio P/E ratio (only company with profits) was 15.5x, the average P/B ratio 2.5x, and the average dividend yield 4.6%

Factsheets highlighting the fund's performance as of 30 April 2013 are available here:

Country Snapshot: Iraq

Every month we highlight economic developments in one country within the Asia Frontier Capital Universe.

Invasion, Insurgency...Investment? Iraq Looks Beyond its Troubled Past

For most people, chances are that the mention of Iraq conjures up images of suicide bombs, sectarian strife, and widespread destruction. In the aftermath of the 2003 US-led invasion and Saddam Hussein's deposition, a power vacuum and simmering Sunni-Shia tensions led to a bloody civil war that undermined prospects for reconstruction or stability. Ever since, international media has been keen to portray Iraq as an embattled state, and any headlines the country does garner are inevitably regarding conflict.

Unquestionably, Iraq's political landscape has remained burdened by bureaucracy and corruption since the ousting of Saddam Hussein and the Ba'ath Party. And although the current Prime Minister, Nouri al-Maliki, is seen as a stable US ally who has cracked down on the insurgency, his rule has been criticized by Sunni leaders who argue that his Shiite-affiliated Islamic Dawa Party has become too cozy with Iran while neglecting Iraq's Sunnis. Furthermore, continued attacks from former Ba'athists and al-Qaeda-linked Sunni extremists have not helped the fragile unity government, and progress towards cementing vital oil and foreign investment laws has been sidetracked by political disputes and infighting.

However, the tendency to categorize Iraq as another 'doomed nation' is specious. If you ignore newspaper scareheads and dig deeper, you will find encouraging indicators underpinning Iraq's slow yet promising recovery. The security situation has improved dramatically in recent years - sectarian violence has fallen 90% from its peak 2006-07 levels, 24-hour street life has returned, and homicide rates have dropped below those of Chicago. On the economic front, Iraq was one of the world's fastest growing economies last year, posting 10.2% GDP growth. Renewed foreign investment in the country's petroleum industry and a recent IPO on the Iraq Stock Exchange are telltale signs of growing confidence in Iraq's economic outlook and capital markets. Having gone through 3 wars and 13 years of economic sanctions over the past three decades, Iraq has been dubbed a basket case by most. But for savvy investors who can look beyond the country's troubled past, Iraq's uncelebrated progress makes it an alluring frontier market opportunity.

Post-war economic growth has been impressive in spite of the uncertainty surrounding Iraq's tenuous political environment - the IMF projects Iraq to record 14.7% GDP growth for 2013, a remarkable feat given the country's recent history. After Saddam Hussein's invasion of Kuwait in 1990, the UN Security Council levied crippling economic sanctions against Iraq, which continued through 2003 until Saddam was deposed. Prior to the US-led invasion, Iraq had a state-owned economy in which foreign ownership was illegal and high tariffs were put in place to keep out imported goods. With the shaky peace that has held, Iraq has embarked on an aggressive privatization program, auctioning off formerly nationalized companies and encouraging foreign investment. China and South Korea have both become major trade partners - China's Shanghai Electric is breaking ground on a US $1 billion project to build a power plant in Wasit Province and a Korean developer won a US $35 billion infrastructure deal to build 500,000 housing units in the country. Next year, Iraq may become Turkey's 2nd largest export destination and will be able to piggyback on some of the growth that Turkey - a booming emerging market - is bound to achieve in the coming decades.

Improvements are also being made from a macroeconomic standpoint. Despite experiencing severe inflation of up to 70% in 2007, the Central Bank has been able to reduce the number to single digits in recent years, and it currently stands at 5%. Foreign reserves are expected to hit US $110 billion by the end of this year and the country has very little debt. Over the last eight years, Iraq's GDP per capita has quadrupled and continued economic growth will be driven by its population of 33 million - 60% of whom are under the age of 20 - and its enormous oil reserves.

Iraq's economic revival has been reflected in the growth of the country's sole bourse, the Iraq Stock Exchange (ISX). The ISX began operations in 2004 and has remained open and functional throughout the country's tumultuous history, despite being targeted by an attack in 2010. Although it is one of the youngest and smallest exchanges in the region, recent IPO activity and a new custody license have attracted the interest of foreign investors.

In February, Asiacell, the Iraqi subsidiary of Qatar Telecom, successfully launched an IPO worth US $1.3 billion - the biggest initial public offering in the Middle East since 2008. The flotation was fully subscribed, and shares closed up 5.7% on the first day of trading. With Asiacell valued at roughly US $4.95 billion, the IPO doubled the market capitalization of the Iraq Stock Exchange to US $9.2 billion. The listing was also a testament to the growing confidence in Iraq's capital markets from international investors, as 70% of the shares that were floated were bought by foreigners, particularly from the Persian Gulf.

Alongside Asiacell's IPO, the ISX recently introduced a custody license to provide more security for foreign investors and to allow larger brokers to invest in Iraq. Most large institutional investors and emerging market mutual funds are required to have their shares held by custodians, and this development will encourage more foreign participation on the Iraq Stock Exchange.

Despite liquidity challenges, low market turnover, and a limited choice of sectors, the Iraq Stock Exchange remains attractive. It has very low valuations and is cheap in terms of price/earnings - many ISX stocks trade at a P/E ratio of around 4. In addition, there is a strong outlook for corporate earnings and a variety of industries are experiencing growth.

The dominant sector for Iraq's economy remains oil, and production is up 40% from three years ago. In 2012, output rose 24% to reach 3.35 million barrels per day, the first time in over thirty years that production exceeded 3 million barrels. Iraq possesses the fourth largest oil reserves in the world and will produce 45% of the world's marginal oil over the next twenty years. Just recently, the country surpassed Iran as the second largest oil exporter in OPEC, behind Saudi Arabia. In addition to ExxonMobil, Shell, and BP, a number of other petrochemical companies such as Gazprom, Petrofac, and China National Petroleum Corporation (CNPC) are now active in the country, both in southern Iraq and in oil-rich, autonomous Iraqi Kurdistan.

Iraq's telecommunications sector, as highlighted by Asiacell's recent listing, is another industry poised for growth. While many Middle Eastern countries have 90-130% mobile penetration, Iraq has one of the lowest rates in the region at 77%. Likewise, internet penetration stands at merely 10%. Just as Asiacell's IPO was a precondition of the company being granted an operating license, Iraq's two other major telecom players are also required to offer 25% of their shares to the public by listing on the ISX. Zain Iraq, a subsidiary of Kuwait's Mobile Telecommunications Co. that is even bigger than Asiacell, plans to list in June. Korek Telecom, part-owned by France Telecom SA, must also list. These upcoming initial public offerings have the potential to increase the Iraq Stock Exchange's market capitalization to over US $15 billion.

Another promising sector for Iraqi stocks is financial services. Prior to Asiacell going public, banks accounted for 83% of the ISX's market capitalization. Iraq's rising income levels are increasing demand for banking services, and both domestic banking institutions and foreign subsidiaries are listed on the bourse. Many banks on the Iraq Stock Exchange have exhibited stellar performance in recent years, with certain banks seeing their earnings quintuple from 2010 to 2012. Only about 15% of Iraqis have bank accounts, indicating huge potential for growth in upcoming years.

As Iraq continues to rebuild, rising income levels will lead to growth in the consumer goods sector across a variety of industries. Baghdad Soft Drinks, an Iraqi distributor with the exclusive rights to sell PepsiCo products in the country, saw earnings increase 500% last year, as demand for authentic Western goods has skyrocketed. General Motors (GM), the Detroit automaker, sold approximately 35,000 vehicles in Iraq in 2011, accounting for 30% of the new automobiles sold in the country and making Iraq the company's second largest market in the region. GM believes that the market for new cars and trucks in Iraq may double within the next 2-3 years. Even luxury goods are on the rise in Iraq - high-end retailer Paris Gallery is planning to open five stores in the next three years and Sheraton is building two hotels in Iraqi Kurdistan.

Infrastructure development is another area that will draw investment. Most Iraqi businesses currently only get 8-10 hours of electricity per day from the grid and must supplement this shortage with private generators. With power plant projects underway, the recurring blackouts that plague Iraq's industries should soon be a thing of the past. In addition to an electrical grid, the country's schools, hospitals, sewage systems, municipal water facilities, and airports are all in deplorable condition after nearly three decades of war and will need rebuilding.

A final priority sector is housing and construction. Iraq faces an acute housing shortage and an estimated 3.5 million homes will be built over the next decade. Baghdad's housing crisis is causing real estate prices to spiral upwards, and the Iraqi government is planning to spend US $30 billion on housing in the capital city in the next few years. The construction industry as a whole is expected to grow by over 6% a year through 2014.

The autonomous region of Iraqi Kurdistan in northeastern Iraq has shined as one of the country's bright spots. Long oppressed by Baghdad, Kurdistan was formally recognized by the new Iraqi Constitution in 2005, which defines Kurdistan as a federal entity of Iraq but recognizes the region's partial sovereignty and elected government. The Kurdistan Regional Government (KRG) was formed in 1992 and split into two administrations in 1994 after the outbreak of civil war. Kurdistan remained under two separate administrations (one located in Erbil and one in Sulaymaniyah) until 2005, when the two parties merged. Due to Kurdistan's stability and substantial oil reserves, the region is more developed than the rest of Iraq and it has attracted more investment than anywhere else in the country.

Relations between Erbil and Baghdad have become increasingly tense, however, as many Kurds feel that the Baghdad government has diverted funds away from them. A number of major oil firms have been lured to Kurdistan by better contracts and operating conditions, and a dispute last year led to the deployment of troops from both sides on an internal border. While the KRG is trying to develop additional areas of its economy such as agriculture, tourism, and industry, Kurdistan's oil reserves continue to be the backbone of the economy and a contentious issue with the federal government of Iraq. Baghdad was livid when ExxonMobil exited Iraq's West Qurna 1 oilfield to focus on Kurdistan, signing an exploration agreement with the KRG without seeking preapproval from the Baghdad government. As the first major oil company to sign an agreement with the KRG, ExxonMobil exacerbated tensions between Baghdad and Erbil and reaffirmed the importance of petrodollars to both sides. For the economic benefit of both Iraq and Kurdistan, clear laws need to be finalized soon to safeguard foreign investment in the petrochemicals sector.

Another risk to Iraq's recovery is perpetual sectarian conflict. Although violence is dramatically lower than its peak 2006-07 levels, bombings have continued to plague the country, with a February bombing in a Shiite neighborhood of Baghdad killing 22. Thousands of Iraq's Sunni Muslims have protested against Prime Minister Nouri al-Maliki's Shiite-led government due to what they feel is unfair treatment, and al-Qaeda-affiliated Sunni extremists have sought to exploit the tensions by targeting Shiites with bombings in an attempt to spark renewed civil war.

Iraq will also feel the consequences of ongoing unrest amongst its neighbors. As the war in Syria continues, the spillover of fighting and refugees threatens to destabilize Iraq - 40 Syrian soldiers were recently ambushed and killed in Iraq. Iraqi Prime Minister al-Maliki recently proclaimed that a victory for the Syrian rebels could reignite the flames of sectarian conflict in Iraq, Lebanon, and Jordan and lead to rising Sunni extremism in Syria. An escalation of conflict between Iran and Israel would also certainly have negative repercussions for Iraq.

Despite the challenges, Iraq is making steady strides on the road to recovery and is continuing to lure multinational firms and foreign investors with its improving security situation, massive oil reserves, and promising economic outlook. The governments in Baghdad and Erbil must ensure that all Iraqis share in the country's economic growth, as unemployment and corruption remain far too prevalent. In spite its impressive economic indicators and wealth of petrochemicals, Iraq remains an oft-ignored, negatively-portrayed country. Seasoned frontier investors should see through these misconceptions and recognize that the first-mover advantage in Iraq could translate into sizeable returns. Starting in March 2013, the Leopard Asia Frontier Fund will begin making its first investments in Iraq.

Travel Notes

Venturing into Iraqi Kurdistan, a Forgotten Frontier

Although in the recent era Iraq has become notorious for sectarian conflict, the land enriched by the Tigris and Euphrates Rivers was once the 'Cradle of Civilization', and Ancient Mesopotamia - home to the Babylonians, Assyrians, and Sumerians - saw many of the first innovations in farming, writing, and architecture. For adventurous travelers willing to go off the beaten path and eager to tap into Iraq's enthralling past, Kurdistan is the perfect destination.

Many would be surprised to find out that one can fly to Iraq from Germany, Greece, Austria, Sweden, Turkey, and the UAE. Erbil, the capital of Iraqi Kurdistan, has undergone a US $550 million expansion project on its airport to cater to the growing investment interest and tourist demand in this oft-forgotten autonomous region in northeastern Iraq. Despite being bordered by Syria to the west, Turkey to the north, Iran to the east, and Iraq to the south, Kurdistan has largely avoided the instability and violence that has affected the region. Having been oppressed for decades by Saddam Hussein and the Ba'ath Party, Kurds strongly supported the US-led invasion and Kurdish soldiers, known as Peshmerga, fought alongside the US military against Saddam's Iraqi government. Touting its political stability and petroleum potential, the region has welcomed foreign investment in its oil, construction, and retail sectors.

Unless arriving via bus from Turkey, most travelers begin their journey in Erbil (known as Hawlêr in Kurdish), the capital of Iraqi Kurdistan and a vibrant city of 1.3 million. As one of the oldest continuously inhabited cities in the world, Erbil was ruled at various points in history by the Assyrians, Persians, Greeks, Romans, and Ottomans. The city was also a key religious center for Judaism, Christianity, and Islam.

The Citadel of Erbil, a prominent site overlooking Kurdistan's capital.
Photo: Hans Mast

The centerpiece of Erbil, located right in its heart, is its Citadel, a dramatic UNESCO World Heritage Site. An occupied mound currently undergoing restoration, the Citadel was captured by the invading Mongols in the 13th century and has continued to experience damages ever since. Synagogues, mosques, schools, and houses were once located on top of the Citadel, but many of them have since been destroyed and today only the Mulla Afandi Mosque remains. The ongoing construction aims to restore much of the site's traditional Islamic and Kurdish architecture. While at the Citadel, one can also visit the Kurdish Textile Museum, which provides a glimpse into Kurdish weaving, a world-renowned handcraft still practiced by traditional Kurdish communities today. Handwoven carpets and tapestries are on display in the picturesque restored mansion that houses the museum.

Erbil is a great place to immerse oneself in Kurdistan's fascinating culture. The city's best place to wander amongst a dazzling variety of exotic goods is Qaysari Bazaar, which is similar to souks in Istanbul, Cairo, or Fez. Even if halal meat, jasmine incense, or home-made baklava are not the types of souvenirs you are looking to buy, the bazaar is still a good place to take in the sights and smells and chat with Kurds sipping tea or sampling sweets. A stark contrast from Qaysari Bazaar is Majidi Mall, one of the city's many Western-style malls offering name-brands like Adidas, Levis, and Mango.

A vendor selling traditional Kurdish sweets in Qaysari Bazaar. Photo: travelmap.nl

Many people would be surprised to learn that a traveler can quite easily find a beer even in Iraq! Ankawa, a Christian suburb of Erbil, has many stores selling alcohol, and draft beer can be bought at a number of international restaurants, bars, and hotels in Erbil, albeit at inflated prices.

Erbil also hosts a remarkable diversity of dining options. American, Italian, German, Turkish, and traditional Arab food can all be found, but the highlight is local Kurdish cuisine. As one would expect in a place with both Turkish and Middle Eastern influences, Kurdish food combines elements of both regions. Sheep and buffalo milk are used to produce a variety of yogurts and cheeses, which are often eaten with a naan-like Kurdish flatbread and a number of different meat dishes or fried dumplings of meat and vegetables. Cucumbers, tomatoes, and spinach accompany most dishes, and spicy soups and stews are widely available. Kurds share the Turk's affinity for sweets, and honey-covered pastries, baklavas, cookies, and sugar-coated fried pieces of dough are presented at the end of a big meal, washed down with cups of black tea.

Looking down onto Erbil Plaza. Photo: Fred Bellomy

Heading north into the mountains from Erbil, the dramatic waterfalls of Gali Ali Beg are a popular place for Kurdish holiday goers and thrill-seeking tourists alike. If a simple walk seems too run-of-the-mill, the area is also a popular whitewater rafting excursion, and any story beginning with "when I braved whitewater in Iraq" will surely win you the favor of listeners for years to come.

Sulaymaniyah, known as the 'cultural capital' of Kurdistan, is the perfect place to end the trip. Kurdish poets helped develop the Sorani Kurdish literary scene in Sulaymaniyah, and Kurdish maqam music also originated from the city. The city's liberal, artsy edge is noticeable and it is the only place in Iraq that celebrates World Music Day. The area's cool climate makes it a good hiking destination, and excursions into the surrounding mountains can easily be organized from Sulaymaniyah. The city receives many Iranian tourists, who enjoy the town's proximity to Goizha, Azmar, Piramagrun and Baranan mountains.

Rafting at Gali Ali Beg Waterfall in Iraqi Kurdistan.
Photo: Alan Kurdi

Overall, for an intrepid traveler looking to uncover pre-Islamic history, delicious cuisine, and warm hospitality, Iraqi Kurdistan is a great choice. It is surprisingly accessible from Europe and the Middle East, and citizens of the European Union, the US, Canada, Japan and Australia are given free entry stamps on arrival. The region has remained overwhelmingly peaceful despite the southern conflict in Iraq, and visitors who do come to Kurdistan will be lucky enough to have a land filled with dramatic ruins, mysterious bazaars, and astonishing natural beauty almost entirely to themselves. Xuda li gel! (Bon voyage!)

This is Iraq, not Ireland.
Photo: TJ Blackwell/TIME

Emerging Frontiers Blog

We invite you to stay updated with daily investment news and analyses within Asian frontier markets by visiting Leopard Capital's free Emerging Frontiers Blog. Emerging Frontiers now includes news and analysis from all countries within the Leopard Asia Frontier Fund universe.

Kind Regards,

Thomas Hugger
Fund Manager

Disclaimer:

This document does not constitute an offer to sell, or a solicitation of an offer to invest in AFC Asia Frontier Fund, AFC Asia Frontier Fund (non-US), AFC Vietnam Fund or any other funds sponsored by Asia Frontier Capital Ltd. or its affiliates. We will not make such offer or solicitation prior to the delivery of a definitive offering memorandum and other materials relating to the matters herein. Before making an investment decision with respect to our Funds, we advise potential investors to read carefully the respective offering memorandum, the limited partnership agreement or operating agreement, and the related subscription documents, and to consult with their tax, legal, and financial advisors. We have compiled this information from sources we believe to be reliable, but we cannot guarantee its correctness. We present our opinions without warranty. Past performance is no guarantee of future results. © Asia Frontier Capital Ltd. All rights reserved.

The representative of the Fund in Switzerland is Hugo Fund Services SA, 6 Cours de Rive, 1204 Geneva. The distribution of Shares in Switzerland must exclusively be made to qualified investors. The place of performance and jurisdiction for Shares in the Fund distributed in Switzerland are at the registered office of the Representative.

By accessing information contained herein, users are deemed to be representing and warranting that they are either a Hong Kong Professional Investor or are observing the applicable laws and regulations of their relevant jurisdictions.

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