Iraqis and the “Pepsi Challenge” — Geoffrey Batt

Special Value Investing Congress Notes for the Irregulars

This is an interesting one — one we can’t necessarily buy. Geoffrey Batt runs Euphrates Advisors and has a fund that buys stocks on the Iraqi Stock Exchange, and he thinks Iraq is going to have an incredible growth boom in the years to come.

He went over some other huge wins that came from geopolitical risk — Hong Kong and Chinese annexation in the 1960s, South Korea in the 1960s and 1970s, postwar Germany and Italy in the 1950s, Russia in the 1990s, and other big geopolitical risk situations.

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South Korea, for example, was under a brutal dictator but also enjoyed probably the best economic returns of any country in the world in the 20th century. Hong Kong’s big win was because everything was cheap under a fear of Chinese annexation, postwar Germany had fears of Nazi’s returning to dominance, Yeltsin suspended the Russian constitution in 1993 and the tanks rolled in Moscow and were followed by the Chechen war and Yukos oil … but all of these created economic “miracles” of growth over many years.

He says that over time, these geopolitical fears don’t matter. Most of the political developments (assassination attempts, momentary crises) hit the market and cause panics, but shouldn’t influence long term investment decision.

So if those geopolitical risks don’t matter, what does matter?

Macroeconomic stability — Brazil didn’t enjoy a boom because of inflation and currency problems, they didn’t have price or currency stability, you need solid institutions and credibility to bring stability.

Scalable economic growth — you need a country that’s far from “true potential.” True transformation potential — ability to be much, much larger and more significant.

Also want low valuations, and low correlation.

And who has this stuff? Iraq. They have macroeconomic stability. Could be the “next Saudi Arabia or Brazil”, and GDP is already accelerating.

Iraq had 16 years of hyperinflation until 2006, but they’ve had price stability since then and the currency has been stable — credible central bank that handled the recovery well. They knew the inflation was caused by having to import everything because the country had lost almost all productive capacity — and they could allow their currency to appreciate because their only export is priced in dollars, so it was a clever and sophisticated solution that established real credibility.

Once prices stabilized, GDP growth ...

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