The AFC Iraq Fund was up a stellar 110.37% in 2023, making it the best-performing long-only, actively managed, generalist, unleveraged equity fund in the world – according to our research. The fund outperformed its benchmark, the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), which was up 97.2% for the year, making it the best-performing equity market in the world in USD terms.
Q4 2023 hedge fund letters, conferences and more
While the performance of both the fund and the Iraqi equity market were stellar by any measure, they nevertheless were not due to one-off events, but were the kind of returns that were targeted at the launch of the AFC Iraq Fund on 26th June 2015. The country’s potential was held back, and much of its infrastructure was destroyed by over four decades of conflict, and the fund’s thesis was that the country stood to benefit from post-conflict recovery as stability offers individuals and businesses the opportunity to work, employ and spend, which would drive domestic consumption and investment.
Since its launch, the fund focused on capturing the returns of the long-term drivers of the transformation of the Iraqi economy, and in 2023 two of these drivers began to bear fruit. The first of which was the significant fundamental development brought about by the Central Bank of Iraq’s new procedural requirements for its provisioning of U.S. dollars for cross-border transfers in mid-November 2022. A development that is accelerating the adoption of banking and bringing about a transformation of the sector and its role in the economy, and, in the process, boosting the fund’s long-term strategy for the sector. This increased adoption of banking would come with growth in bank lending, resulting in an expansion in the money circulating in the economy and, consequently, an increase in non-oil GDP. The second driver was the cumulative positive effects of the relative stability that the country has enjoyed over the past few years, creating a more stable and predictable macroeconomic framework for businesses and individuals to operate in and plan for capital investments on a scale not seen in the preceding decades of conflict.
Both of these drivers are in the early stages of their transformation of the Iraqi economy, a process that would unfold over the next few years bringing with it economic growth that would feed into higher corporate profits, and ultimately higher stock market returns. We believe that the fund’s holdings stand to capture these returns in the next few years in the same way that they did in 2023. The Iraqi equity market, while beginning to discount these positive developments, is in the early phases of emerging from a brutal seven-year bear market, that even after the stellar returns of the year it still is 26.2% below the all-time high achieved in early 2014 before the onset of the bear market. While risks to the Iraq story remain a factor given its history of conflict, extreme leverage to volatile oil prices, as well as the risks of a potential widening of the current Middle East conflict that could destabilise the region. However, both fundamentally and technically, the risk-reward profile of the market is very attractive compared with most global markets (see chart below).
Iraq Stock Exchange Index versus MSCI's Broader Indexes
(Source: Bloomberg, data as of 8th January 2024.)
Please stay tuned for the upcoming newsletter with more information about the AFC Iraq Fund and our other funds. Links to the fund's latest factsheet and presentation are available below. If you have any questions in the mean time, please feel free to get in touch with us at info@asiafrontiercapital.com
With kind regards,
Ahmed Tabaqchali,
Chief Strategist,
AFC Iraq Fund