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Capital Markets

Iraq: Sovereign’s bonds offer possible source of alpha

It might not be the most obvious investment, but if emerging market fund managers want to buy a credit that offers long-term potential, they could do worse than invest in Iraqi debt.

At least that’s the view of Mike Conelius, emerging markets portfolio manager at T Rowe Price, in Baltimore.

The continuing violence and political instability in the country are, at first glance, reasons to steer well clear but from a financial viewpoint the sovereign’s bonds provide a possible alpha play, Conelius reckons.

In the short term, Iraq’s debt dynamics are actually highly attractive following agreements with the Paris Club of official creditors on $40 billion of debt and the London Club of commercial creditors on just under $14 billion of debt, he says. Even in the long term, as long as there is some degree of stability in the country, its debt servicing needs should not become onerous.

“If you look at Iraq’s fundamental debt stock and its resource potential, its bonds are very attractive,” says Conelius, referring to its oil assets. Iraq represents just 0.6% of JPMorgan’s Embi Global index but T Rowe Price is heavily overweight, owning 5% of the sovereign’s debt. Conelius admits that Iraq’s debt has underperformed the market by 10% this year but insists that the bonds have held up well, given the political situation. They were created following a debt exchange in January that involved $13.6

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