While it’s folly to depend on these projections into 2029 given the history of oil price forecasts, the world economy’s fundamentals for the next 1-2 years lead credence to oil price expectations for 2022-2023. Oil prices at these levels are positive for the country’s financial position in that they would provide governments, current and upcoming, with the wherewithal to continue with current expansionary economic policies that would also still allow for the accumulation of budget surpluses. Moreover, they would also lead to multi-year positive balances in the country’s current account which in turn would translate into meaningful increases in Iraq’s foreign exchange reserves.
A great deal of the political uncertainty that followed the national elections on 10th October 2021 was resolved on 27th December 2021 with the Supreme Court’s ratification of the election results, rejecting the appeals of the losing parties for a recount, and paving the way for a government formation. However, the government formation will be more tortuous this time given the different election fortunes of the two rival coalitions that defined the political scene and led the two government formations post the ISIS-conflict.
The Sadrist Movement, best known through its leader Muqtada al-Sadr, achieved significant seat gains at the expense of the Fateh Alliance that represents the country's Popular Mobilization Forces (PMF). Nevertheless, the most likely outcome is still that the composition of the new government will closely mirror the last two and will be strongly influenced by both the Sadrist Movement and the Fateh Alliance; but the relative strength of each will change reflecting the election results. Although, the surprising developments of the first session of the new parliament on Sunday 9th January 2022, seem to imply that that the outcome is a government led by the winning coalition, i.e., the Sadrist Movement, or overwhelmingly influenced by them. However, irrespective of either outcome, any upcoming government would come about with similar tenuous compromises that defined the 2018 government. As such, its need to gain public support implies that it will likely follow the 2018 government’s populist policies as expressed in its expansionary first budget for 2019.
Given that government formation is unlikely to occur before the end of March 2022, the current caretaker government and the upcoming government would continue implementing the 2021 expansionary budget until the end of 2022. Moreover, the new government’s first budget for 2023 will likely be more expansionary than the 2021 budget. Consequently, these budgets will sustain and re-enforce the current consumer-led economic rebound into more sustainable economic growth, which in turn should lead to a continued recovery in corporate profits.
The fund’s top five holdings discussed above – listed alphabetically BBOB, BCOI, BNOI, IBSD, & TASC – are expected to be prime beneficiaries of this economic growth. Each holding’s attractiveness and leverage to this growth will be featured in future newsletters.
In ending the year, we firmly believe that the AFC Iraq Fund is well-positioned to capture and benefit from the expected earnings growth of its key holdings, and from the revival of the broader macro-economic backdrop of the country. Finally, while the unexpected technical selling in November 2021 significantly dented the AFC Iraq Fund’s performance, cutting the earlier expected full-year return by about half, we view this dip as a significant buying opportunity in the AFC Iraq Fund.
At the end of December 2021, the AFC Iraq Fund was invested in 13 names and had a cash level of −2.2%. The fund invests in both local and foreign listed companies that have the majority of their business activities in Iraq. The markets with the largest asset allocation were Iraq (99.6%), Norway (2.1%), and the UK (0.5%). The sectors with the largest allocation of assets were financials (66.4%) and consumer staples (14.7%). The fund's estimated weighted harmonic average trailing 12 months P/E ratio (only companies with profit) was 9.54x, the estimated weighted harmonic average P/B ratio was 0.92x, and the estimated weighted average portfolio dividend yield was 4.11%.