The AFC Iraq Fund Class D shares returned −5.6% in December with a NAV of USD 565.61 underperforming its benchmark, the Rabee Securities RSISX USD Index (RSISUSD index), which lost 4.8% during the month. For the whole of 2020, the fund lost 9.8% while the index was down 5.4%, and since inception, the fund lost 43.4% while the RSISUSD is down 55.1%.
For Iraq and its equity market, the year ended the same way it began, with a bang that is much louder than its effect. The official IQD exchange rate versus the USD was reset from 1,190 to the new USD rate of 1,460 on Sunday 20th December 2020 – or a de facto devaluation of 22.7%.
Since the AFC Iraq Fund’s FX rate for the monthly NAV valuation, as well as that of its benchmark, are based on the parallel market FX rate, which has been trading at an increasing premium versus the official rate throughout the year, the effect has been smaller than the full 22.7% devaluation as the fund’s monthly NAV’s have been absorbing these increasing premiums throughout the year.
The fund’s estimated 4.4 percentage points of under-performance relative to its benchmark for the year came on the back of two years of very strong outperformance. It was up 6.7% and up 3.6% in 2019 and 2018 respectively, outperforming its benchmark by 8.0 and 18.6 percentage points respectively. The 4.4 percentage points of underperformance for 2020 was partly caused by the timing of the last trading day of the month for the Iraq Stock Exchange (ISX) in December, which was 24th December. The index bases its price in USD on the IQD/USD exchange rate on the last trading day for the ISX, while the fund’s NAV reflects the exchange rate on the last business day of the month which was 31st December 2020. Typically, such a disparity in pricing dates makes only a minor difference to performance, however, this year it had a negative effect of around three percentage points on the fund versus its benchmark given the volatility of the parallel market’s exchange rate as discussed below. This disparity in exchange rates should be corrected in January 2021.
The IQD’s parallel market’s FX price increased throughout the year, from 1,203 at the start of 2020, reflecting several factors. Starting with the momentous events at the beginning of the year that raised the spectre of a US-Iran proxy war fought in the country, followed by the full lockdown from mid-March and the rolling lockdowns that cut the working weeks to four days throughout the summer, and finally by the rumours of a devaluation as last reported on here in October. By the end of November, the IQD parallel market FX rate was about 1,250 IQD to the USD and throughout December increased to about 1,300, just before the devaluation was made official. However, after initially increasing to about 1,470, trading at a premium to the official price, it began to decrease in the following days to about 1,390, trading at a discount to the official price, before rising higher than the official exchange rate as the month concluded.