Trading with whiteboards and paper slips, a handful of fledgling stock markets such as Iraq and Ghana have escaped the crash of their more developed rivals -- benefiting in large part from isolation and lack of liquidity. Ghana's stock exchange is up 60 percent this year according to the official indicator, in sharp contrast to other emerging markets which are down more than 60 percent on the year to date, savaged by recent market turmoil.
The official indicator for Baghdad's Iraqi stock exchange showed it soaring 40 percent in September alone -- the same month Lehman Brothers went bankrupt and other markets nose-dived. Some distrust that figure, but say that overall, Iraqi stocks remain in positive territory this year. Neither market is electronically traded -- although both aim to become so. Both have been largely overlooked by foreign investors even during the recent boom in frontier markets that preceded the crash.
Godvig Capital fund manager Bjorn Englund -- whose $22 million Babylon fund is the only substantial foreign portfolio investor in the Iraqi bourse -- says the moral for investing in a downturn is clear. "The lesson is that you shouldn't follow the herd," he told Reuters by telephone from his office in Sweden. "You have to go somewhere where other people are not, where you have the first- mover advantage."
Other markets still up by mid-November included Tunisia and Ecuador, again small markets with little foreign involvement. By contrast, according to index provider MSCI Barra, more mainstream frontier markets from Nigeria to the Middle East have broadly tracked the standard emerging markets index.
VIOLENCE DOWN, STOCKS UP: The Iraqi stock exchange lost well over half its value after it opened in 2004 following the US invasion the previous year, but has benefited this year from a dramatic fall in sectarian violence and, until recently, from high oil prices.
As world markets tumbled last month, sweaty investors waved and made hand signals at the brokers working behind a low partition. Hotels and banks are the hottest picks among the exchange's 95 listed companies, as investors eye a reconstruction bonanza and the need to house expatriate workers. Englund said Iraq's isolation from global markets was also key. International investors are often highly leveraged and liable to sudden margin calls, prompting them to pull money from emerging markets across the board regardless of fundamentals.
"There is very little foreign money in the (Iraqi) market so it has not seen the sort of outflows you have had elsewhere," he said. "The exchange has been immune to what has happened in the outside world." But the market is far from transparent, he warned. He is sceptical of the official main index figures, saying its calculation is opaque and does not always correspond to movements in the main stocks.
The more liquid ISX banking index, which makes up more than 80 percent of turnover, was flat in September and has risen 6.2 percent this year in local currency or 9.6 percent in US dollar terms as the dinar strengthened.
HARD TO SELL: "That is still pretty good when you compare it to what has happened elsewhere," Englund said. Ghana too has benefited from good local fundamentals, based around recent oil discoveries, good prices for its main gold and cocoa exports, political stability and economic growth, although the market has retreated from its peaks of early October.
The IMF expects Ghana's economic growth to slow to 5.8 percent in 2009 from a projected 6.5 percent this year as the global slowdown hits. But those rates are still well ahead of advanced economies, where 2009 growth is seen below 0.5 percent.
And crude oil production, scheduled for late 2010, should give a boost to what is already one of Africa's more attractive and stable economies for outside investors. But again, Ghana's relative isolation is key to recent gains. "There is not the foreign investment here that you get in some markets, and that is why we have not seen the falls you saw in South Africa or Kenya," said Databank analyst Dorothy L. Ametefe from the capital Accra.
She said lack of liquidity in the market was itself limiting the speed of the correction lower, with both foreign and local investors who were trying to sell out finding it almost impossible. "The problem is that volumes have dried up and it is very difficult to find buyers at these prices," she said. Some days the market is effectively untraded.
But if foreign investors are trying to exit Ghana, they are still coming into Iraq. Englund said they made up almost 18 percent of overall trading volume since August, more than triple the average during the December-February period.
Both markets' transition to electronic trading should deliver greater volatility and ease of access for foreign investors in the hope of facilitating long-term investment -- but that may end the isolation that has protected hem. "There are clear advantages to electronic trade," said Databank's Ametefe. "But it will increase the vulnerability to external events."
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