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In short, we believe that we have seen the worst in Iraq. Much has improved, but not yet translated into higher share prices. So we believe that stocks are at/near the bottom and set for a recovery that will hopefully last a number of years.

In detail:Iraq was hit by a perfect storm in the summer of 2014, when oil prices started collapsing and ISIS (Daesh) forces swiftly gained ground in the western and north western parts of Iraq. As a results we saw a big impact on the business climate in parts of Iraq, and many of our underlying companies have been reporting falling revenues and profits. Most local and international Iraq stocks are today trading at the lowest levels we have ever seen, and the index is down a whopping 65% over the past 24 months.

Now the good news is that Daesh are being pushed out of Iraq, which means better security and increasing economic activity. Secondly, the oil price has rebounded sharply and Iraq continues to grow the output of oil. When we started investing in Iraq 6 years ago it was pumping just over 2 m bpd. Today Iraq (including the KRG) is pumping close to 5 m bpd, so clearly a low cost producer with the ability to expand further.

Iraq remains a true frontier market in the sense that it does not price in events efficiently (due to low liquidity, not very accessible, not very known etc.) and this has also been the case as of lately. Despite improvements in the struggle against Daesh and rising oil we have yet so see a meaningful rally in Iraqi stocks. We have noted similar lags historically and believe that a rebound in the second half of the year will take place, unless any unforeseen major events occurs.

Going forward, the price of oil will continue to play a big role for the development of the country. If Syria manages to hold the cease fire that will also be a big boost to Iraq, which harbors over a million refugees. Politically Iraq remains fragile as most young democracies. Three successful parliamentary elections have given a solid ground, but most governments have proven fairly inefficient. The current Prime Minister has performed well considering the circumstances and he still has a large support base.

In a muddle through scenario, where Deash continues to lose ground and without black swan events, we see company earnings normalize and a tremendous upside in the Fund´s holdings.

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