Tehran Stock Exchange, Right Place, Right Time!
By Mahdi Goodarzi & Alireza Hojjatnia
Placed 5th amid middle eastern financial markets, Tehran Stock Exchange is known as the biggest of frontiers; a USD 100 mn market, bigger than Kuwait, Pakistan, Nigeria, Vietnam and even Argentina. Now that the disputes over Iran nuclear program have been resolved, it is time for foreigners to dip their toe into the nation’s capital market investment water, considering the risks of course. In addition, further developments in banking relations with international piers, specifically EU, have made the interactions even better.
Although the timing seems right, yet addressing a couple of points before getting deeper shall not be pointless. After more than two years of sitting with numerous mutual funds, investment firms, money managers and investment banks, it is safe to say that perceiving the source of the existing risks will be the master key through this nested coil [for foreigners] of Iran’s capital market. The triple “R”s below will cover the general scope of risks one has to consider accordingly:
- Reliable bank
- Responsible broker
- Right market
Debt over equity! (Right Market)
“The risks have to be hedged”. This is no news in advance financial markets and probably is one of the most influential factors amid investors. Iran’s capital market undeniable fact, however, is that there are no proper and practical instruments for managing the investment risks. The suggestion here is to enter the market where the imposed risks are minimum. Even domestic mutual funds are now allocating a fair share of their portfolios to debt securities. It is also worth mentioning that yields are more than attractive in contrast with international piers since the nation is thirsty for gigantic amounts of financing. Eyeballing the monthly trade value of debt securities on IFB plus the total debt market cap through 2016/17 is an endorsement to the case.
Go private! (Responsible Broker)
Iranian brokers are categorized in three main classes:
- Bank and governmental institution – affiliated brokerage houses
- Family offices
- Blue chip privates
It is only logical to go with the blue chip privates and here is why:
Bank and governmental institution – affiliated brokerage houses are not properly trained to handle international clients; they do have other priorities before offering services to foreigners and considering the huge internal trades they have to handle for the parent institution, there are a lot on their plates. Due to existence of said trades (mostly blocks on Tehran Stock Exchange or Iran Fara Bourse), they do not face any profitability concerns mostly because they are well compensated doing what they do. That kills the development spirit and consequently, there is no will behind investing on infrastructures needed when providing international services.
Family offices are not ready to invest large and they mostly offer services to a handful of domestic clients. Almost all of them are low on rankings due to the fact that their services only bound to the brokerage side. They also have small caps and the financials are limited; there is no need to point out that firms this size usually are not prepared to invest on infrastructures.
The blue chip privates, on the other hand, have made themselves familiar with the literature over the years and they know all restrictions and considerations better than anyone. The professional team adjusting foreigners’ sentiment is already in place providing investors with A to Z of their needs (e.g. reports, research, company meetings, etc.). Do not forget the fact that their limited number in count will prevent drowning in the sea of choices. After all, it should be kept in mind that the vast network of connections privates has along with invaluable experience they have gathered though the years has made them the best there is when it comes to picking domestic partners.
Choose wisely! (Reliable bank)
Passing the first two “Labours” and considering the case that one has already made their decision to dive in, now it is the time to wire the funds. The transfer shall only take place over banks with solid back bones, providing near world class services via the rather huge network of correspondents they have. Along the road new concepts will come, which have hardly ever been the subject of discussion for Iranian banks. They have to get themselves familiar with senses like Knowing Your Clients (KYC), Compliance, Anti-Money Laundry (AML), and the Third Party Involvement in Transactions (e.g. exchange houses). A handful of them are now struggling with all these new perceptions.
The agility of providing such services, not to mention the prompt KYC and due diligence, shall be the golden point of choosing the right bank which also leave investors with a limited number of options. As of now, only a few couple of listed private banks offer practical solutions only to their foreign institutional clients mostly consisting AIFs, Asset managements, mutual funds, etc.
Absence of proper practical knowledge on regulations governing the international financial institutions, hand in hand with lack of sufficient awareness around their routine processes and how they actually work, would cause misunderstandings that would lead to a dysfunctional future collaboration later. Moreover, there are impediments on foreign institutions imposing by their very own prospectus or AoA, concerning the compliance schemes and other related issues. Of course back their domiciles, all market practitioners are a “know-it-all” when it comes to these limitations, it is yet an unknown territory for the Iranian side. Taking the fact that realizing these barriers would effectively help preventing any subsequent “dangers” under attention, it would be only logical to see all of these before jumping into the third “R”.
It is time to make peace with the toughness of getting into Iran’s Economy. This article is not to provide how to make money suggestions; yet, the writers intend to shed light on how to enter Tehran Stock Exchange and what to look for before getting dirty. The importance of triple “R”s is not in dark to naked eye; however, the consequences of ignoring them might be a waste of time mostly due to the fact that taking the wrong way would not only make investors sick, but also would build resentment and reluctance towards their re-entrance.
DISCLAIMER: This article has been prepared and issued by Agah Brokerage Firm on the basis of publicly available information, internally developed data and other sources believed to be reliable. The information contained herein is not guaranteed, does not purport to be comprehensive and is strictly for information purposes only. Agah does not assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions. Any expressions of opinions are subject to change without notice.
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