I ran will soon be hosting international fund managers and investors, who are already gearing up to flock to one of the world’s few untapped markets. However, the country is not fully prepared. In an attempt to delve into the hidden potential, and analyze the required infrastructure, the Financial Tribune conducted an interview with Gavin Serkin, author of the book ‘Frontier: Exploring the Top Ten Emerging Markets of Tomorrow’ (Wiley, 2015).
Why are international fund managers gearing up to flock to Iran’s market?
There are many, too many, places with their potential drained by war, foreign isolation or poor governance, where even the most adventurous among investors don’t dare to tread for now – like Libya, with Africa’s largest oil reserves, or Iraq, with the world’s fifth-biggest. North Korea, rich in iron ore and largely untapped rare earth metals, is studied from a distance for signs of a thaw in relations with the West. Cuba, with its sugar and nickel industries, is on the cusp of opening to investors. Among these future frontier destinations – each with a legacy of external debt markets going back decades – the most compelling is Iran.
To big international investors, Iran is truly the last frontier. I know big-money western investors who are already planning trips to check out what to buy. The attraction is Iran’s large, educated population that in spite of years of sanctions is incredibly internationally-minded, creating potential for a strong economic recovery.
The rather strange reality is that Iran is extremely well known to western investors because it successfully sold international bonds earlier this century and has a well established stock exchange.
Iran is viewed as holding strong potential by investors because the size of its population allows domestic consumer companies to build up a strong base domestically. Many investors compare Iran with Turkey given the similarities from a western perspective, at least in terms of the population size, geography and social/religious makeup.
But with 9% of the world’s oil reserves and a stock exchange with a market capitalization of $150 billion, the potential is even greater than in Turkey. Iranian companies pay wages below those in Vietnam and are well diversified. Some western companies already have a presence, such as Pepsi, Danone – the formerly French-linked car manufacturers.
What does the equity market need in order to be well-prepared?
Investors will need to feel comfortable that the process of re-engagement with the West won’t suddenly snap back the other way. They will also require transparency from the companies, the stock exchange and the government. They will be taking a leap of faith to an extent and need reassurance that everything will be open and accountable.
Are frontier markets really attractive?
In a world where investors are earning close to zero percent on western nation bonds, frontier markets are particularly alluring. These are the emerging markets of tomorrow, with some of the fastest economic growth rates and highest investment returns. It’s the reason I focused on such countries in my book. There’s no reason - if and when sanctions are lifted - Iran can’t join these fast-growing economies that are attracting billions of dollars in investment. Iran would have a clean slate in terms of economic potential after so many years of isolation. It would have very low debt by the standards of other frontier markets on account of being locked out of the international capital markets for so long. This makes it a compelling place for investors to pursue.
