Iranian doors opened for foreign portfolio investors in April 2014, enabling Iran’s diversified economy to be capitalised following on from the historic nuclear deal with the P5+1.
The Tehran Stock Exchange is driven mostly by public sector pension funds, domestic investors and investment arms of government-owned banks, with portfolio investments only accounting for 0.5% of Iranian stocks being held by foreign investors. Nevertheless, the landscape seems to be changing into one that favours investment from developed economies, that may indeed make up a greater percentage of investment into Iranian capital markets. Jim O’Neill, the economist who coined the ‘BRIC’ term, has himself included Iran in the ‘Next Eleven’ list of emerging economies that could challenge the G7 in the global economic arena.
Turquoise Partners, a boutique Tehran-based investment management firm, manages 90% of all foreign portfolio investments in the Tehran Stock Exchange and even have an exchange-traded fund (ETF) that tracks the TSE-30 Index which raised $3.7million just in its first fortnight. This ETF was previously only available to investors from countries that did not impose sanctions on Iran. However, the removal of the sanctions means that the firm can now facilitate foreign portfolio investment into MENA’s second-largest economy. Turquoise has already agreed a deal with Charlemange Capital, a UK-based asset management firm who focus on emerging market equities, to synergise the local and global expertise through the joint venture. The deal initially totals $70million in assets under management, with a further view of increasing the aggregate sum to $200million in the short term, exerting optimism for the Iranian equity markets.
Why invest in Iran?
To many people’s surprise, the country is not solely reliant on its petrochemical industry, unlike many other countries in the Middle East and North African region. Oil production only makes up 23% of the country’s GDP. Although Iran does have the fourth-largest oil reserves and the largest combined hydrocarbon reserves in the world, the country also sits on a high abundance of natural resources whose exploitation can be accelerated through investment, namely via extraction technologies. Since a high proportion of the natural resources industry has been privatised, the coincidence with the liberalising of the capital markets for foreign portfolio investors is a lucrative opportunity that must be seized. Additionally, the services sector comprises 51% of the country’s GDP, with real estate, professional and specialised services contributing 14% to GDP. The country also a strong scientific development sector, a robust financial services sector and a resilient automotive industry that are untapped by foreign investors. Since the TSE itself is liquid, stocks boast low PE ratios with high dividends, it is also the driving facilitator of the country’s privatisation efforts.
Moreover, educated labour pool in Iran, combined with low debt levels and a reformist government provide evidence that the imperative fundamentals are existent for economic growth.
Geographical proximity to Europe, Russia and Gulf economies is also a major fundamental advantage that Iran is equipped with. Investors must also realise the risks, too. Although the country’s military is vigorous and prominent, the country could still be dragged into regional conflicts. Although foreign relations with The West are somewhat more tame, the domestic political climate remains sensitive. Inflation is high. Although the regulatory system is advanced, it is relatively stricter than other emerging markets’.
Investors must remain grounded and alert
When sanctions are lifted on the June 30th, many of the 101 brokerage firms listed on the TSE website will be busy picking up calls from foreign investors for the upcoming months whilst the global economy could potentially witness one of the most expeditious economic growths in the past few decades.