By Nigel Dudley – Agah Group
The framework nuclear agreement between Iran and the major western powers has generated an unprecedented level of excitement from international investors, who believe that, once a final deal is reached, there will be a flood of money into what is one of the last great untapped emerging markets.
The level of pent up enthusiasm has already been demonstrated by the enthusiastic response of the dozens of potential investors from all round the world who have been visiting Tehran in recent months.
These include the French government and there has been much speculation that Renault and Peugeot will be among the first to invest in Iran once sanctions are lifted.
Investors have been impressed by the country’s potential to become a powerhouse economy. With a GDP of $437 billion, making it the 27th largest in the world, a highly educated population of 78 million, a substantial industrial base and a thriving middle class, Iran is a developed country.
But it also has the best characteristics of untapped emerging markets, in part reflecting the consequences of its recent isolation. Its growth valuations and investment opportunity potential are characteristic of frontier markets at a much earlier stage of development.
Moreover Iran is by a long way the largest economy in the world that remains cut off from global markets. And once it is re-engaged, it has the potential to become a powerhouse economy – and European and Asian investors are determined not to miss the opportunities available to those who enter the market first.
Arguably the greatest potential lies in the Tehran Stock Exchange, a mature market which opened in 1967 and has continued to thrive despite the lack of western investment – only a handful of westerners still have money in this market, with the largest foreign manager being responsible for about $200 million.
However the fundamentals of the TSE could not be stronger and the growth potential could not be greater. It has a market capitalisation of more than $100 billion, at least 500 listed companies and daily trading of $80-100 million; it is currently trading at about 5.5 times earnings, compared with 10.5 times for the MSCI Frontier Markets index and dividends are in the low teens.
The TSE also has the quality infrastructure which foreign investors require including a custody and settlement system based on the US Nasdaq model, as well as having an independent regulator and central depository. There are both retail and institutional investors, including state pension funds.
There are no Iranian restrictions on foreign investment so it will be possible to buy shares directly on stock exchange once sanctions are lifted. At present investment comes through private equity open ended funds and exchange trade funds – only 0.5 per cent of Iranian stocks held by foreign investors.
However it is possible to get a sense of the enthusiasm from visiting firms which have been extremely impressed after carrying out due diligence on quoted companies during their visits to Tehran.
Among the most significant developments in recent has been privatisation of state industries, which was started by former President Ahmadinejad and continued by his successor President Rouhani. As a result most of the major companies, including car manufacturers, banks and energy companies are now quoted on the stock exchange.
As is the case in many emerging markets, the financial sector looks to be the most fertile area for initial investment. But there are also considerable opportunities in manufacturing, healthcare, petrochemical and engineering businesses, as well as in the hotels and services sectors.
The consumer goods business is also certain to attract interest, with the high quality of Iranian products ensuring that they are likely to be in demand internationally, particularly from other countries in the Gulf region.
Much depends on the speed of economic recovery. There are positive signs. Its resilience in the face of sanctions has impressed international commentators, while the policies of the current government are already starting to bear fruit.
Although unemployment remains high, the sharp tightening of fiscal and monetary policy has helped stabilise the currency and to reduce inflation to 15 per cent, energy prices have been increased to reflect real costs more closely and the official and primary exchange rates have been unified.
A further boost can be expected when Iran sells its oil and gas on international markets – it holds 10 per cent of global reserves and 15 per cent of gas reserves. Some worry that this will depress the oil price, but others counter that lower prices will make its agricultural and manufacturing base more competitive.
Once one has balanced the challenges with the opportunities, there seems every reason to believe that Iran is as well positioned as it could be to attract the international capital it needs to drive growth.