FMG Iraq Fund lost 1.9% in the 3rd Quarter of 2017

A frontier market like Iraq typically shows low correlation to global market moves, but we did not anticipate the index to lose 8% while the price of Brent rocketed 20%. Foreigners were mainly net sellers in the market, and locals helped them push down the market as they are looking to pick up scripts at lower levels. Valuations in the banking sector have become extremely depressed as blue chip Bank of Baghdad (-19%) has come under selling pressure, which has punished the whole sector. Turnover remained subdued at low levels as liquidity in the country is still scarce. Baghdad Soft Drink recorded solid Q3 earnings (EBITDA +18% y/y) and was one of the few blue-chip companies to close the quarter flattish.

There was no market reaction on bonds and local stocks to the yes vote in the KRG referendum, except for some negative moves in offshore listed energy companies with operations in Kurdistan. As the armed conflict against IS is coming to an end, IMF anticipates a rebound in GDP growth to 2.9% in 2018. IS are retreating across the board, and only have a few positions left in the western deserts of Iraq.

Despite recent positive developments, Iraqi stocks have yet to make a meaningful rally and are trading near their lows. We believe stocks will retrace the positive moves seen in Brent and Iraqi bonds, also supported by very sizable dividends from Bank of Baghdad and Baghdad Soft Drinks, that will be distributed to investors shortly.