By Nigel Dudley – Agah Group
Iran’s capital markets, like those of the rest of the world, are going through extremely difficult times as prices plunge in response to growing concern about the state of the global economy, combined with a slow-paced recovery from the impact of sanctions imposed on the country.
However this cannot disguise the fact that, now the nuclear agreement with the West has been finalised, the underlying prospects for Iran’s debt and equity markets are stronger than for many years.
Western embassies are re-opening, while trade missions and the bosses of investment funds are queuing up to visit Tehran, all keen to take a stake in what is considered the last significant emerging market from which westerners have been excluded.
When positive sentiment returns to global markets, brokers in Tehran are confident that the positive sentiment towards the country will be transformed into a surge of real investment, not least because equity values are now extremely attractive.
At the moment it is hard to identify when the global mood will change and this underlying positive sentiment will be transformed into buy orders. Individual and institutional investors are understandably nervous as they contemplate the sea of red on their computer screens that greeted them on their return from holiday.
And, with fears growing that the problems facing the China could lead to a slowdown in developed and developing markets alike, it is hardly surprising that equity markets across the world have fallen and the prevailing mood is one of extreme nervousness.
This has all happened at an unfortunate time for Iran, which was looking to see its markets boosted by individual and institutional investment in the aftermath of the historic nuclear agreement with the six world powers, headed by the United States.
This deal, signed in mid-July, will lead to the lifting of most European and American sanctions on Iran in exchange for curbs on its nuclear programme.
That deal did not have the expected impact on the Tehran Stock Exchange, which, far from rising, lost most of the gains made as prices rose in the run-up to the July agreement. Once international sentiment changes, the market looks ready for a 10-20 per cent rise in prices, says the Tehran-based Agah Brokerage Company.
The next important date for Iran is September 17th when the US Congress will vote on the nuclear deal. The House of Representatives and the Senate – both with Republican majorities – are certain to oppose it.
However a Congressional resolution will have limited practical impact because neither House can reach a two thirds majority. This means that President Obama will be able to ignore the vote and is likely to maintain this position so long as Tehran honours its commitments to curb its nuclear programme.
So there seems little doubt that once markets stabilise, Iran will be near the top of the list for investors who still continue to visit Tehran and look at the opportunities there, while international finance houses prepare for that time by working more closely with local institutions – for example First Frontier Capital and Agah are working together to produce research on the Tehran Stock Exchange.
The confidence in Iran’s long term prospects is underpinned by the government’s commitment to attracting foreign investment which it sees as the most effective way to deliver economic prosperity.
Despite the challenges of economic sanctions, the economic fundamentals remain strong; Iran has the largest natural gas reserves in the world and the fourth largest oil reserves. With 80 million people, it has the second largest population in the region; it also has an extremely well-educated workforce.
The Tehran Stock Exchange has also been preparing its infrastructure so that it can meet the standards required by international investors. This already includes on-line trading, an arbitration board which will settle disputes rapidly, greater investor protection, surveillance mechanisms and post-trade systems.
The approximately $100 billion capitalisation – including the Iran Fara Bourse market – is at present smaller than comparable regional exchanges such as Turkey and Saudi Arabia but the potential for growth is much greater; brokers say that there will be opportunities to make spectacular returns particularly as shares are more attractively priced at the moment than in most frontier and emerging markets.
Another factor operating in its favour is its diversity. There are 37 different sectors including chemicals, banking, base metals, industrial holdings, telecommunications and oil products.
And there are likely to be many opportunities to invest in newly-established companies. There are expected to be up to $80 billion worth of new petrochemical projects, as well as major developments in the mining, mobile phone, motor, energy and tourism sectors.