With China imploding, Latin America in heavy decline and Russia seemingly on a path of global exclusion, the emerging market growth of yesterday is looking increasingly unattractive, writes Chelsea Financial Services managing director and Mindful Money columnist, Darius McDermott.
So where could emerging market managers turn to now, what is the next generation of countries to move into the investment spotlight? In the first of a new series, we look at the next generation of emerging markets and see what opportunities lie ahead for investors hoping to get to the frontier of the investment world.
After landmark talks, it looks as though Iran will have its sanctions lifted, which will open the economy back up to the world’s investors.
Iran has had sanctions enforced since the Islamic Revolution of 1979, when the US-backed Shah was overthrown. These were enhanced further through the years over Iran’s nuclear program and relations with the US declined markedly.
However, the elections in 2013 brought in President Hassan Rouhani. This brought about a change to a more liberal, open-minded government wanting to reconnect with the world. As such, in July this year, an agreement was made to lift sanctions. If this does go through, the country is likely to see considerable foreign investment which is expected to considerably boost the economy.
One of the most obvious areas of strength in Iran is the oil and gas reserves. About 9% of all oil reserves in the world are in Iran, making it the second largest reserve behind Russia. Having already delivered pipelines to neighbors such as Pakistan, Iraq and Oman, there are now plans a foot to move into the European market and compete with Russia. However, with global supply outstripping demand at present, gas and oil prices have fallen dramatically, therefore external investment for this project will be difficult to come by.
The strong growth sectors of the Iranian economy are manufacturing and mining–currently at 6.7% and 9.8% respectively–with Iran’s industries minister also wanting to prioritize these areas. Two specific areas he has specified are car production, understandable in a country of 70 million people, but only making one million cars, and intriguingly, a $20 billion commitment to mining exploration, a fairly contrarian step considering the falling price of commodities, but perhaps a sign of commitment to developing the infrastructure of this industry for future growth.
Iran’s demographics are also very supportive of growth. Over half the population are under 30, there are high levels of youth literacy and it has world-leading academic research growth. Though these areas are not an immediate focus, the advantages of having a highly literate, youthful population have aided the country into becoming the ninth in creating a domestic space program. They are also one of the world leaders in nanotechnology and biomedical science, demonstrating the intelligence potential Iran could have.
When you couple all of this to Tehran having a well developed stock exchange, with a total market cap of over $170 billion and nearly 340 companies, it can be obvious to see why investors are making moves early to try and secure the best deals. Industrial experts believe the economy could make up to 40% of the frontier market benchmark.
So how can investors get involved? Significant regulations around sanctions for most foreign investors have made direct investment very difficult at present, but many emerging market funds are assessing ways to gain some exposure. Charlemagne Capital, for example, have announced they intend to offer a fund in the near future, and Michael Levy of the Barings Frontier Markets Fund has also proclaimed his excitement about the opportunities available.
A good starting point may be to find funds with exposure to firms operating in the region, which are likely to see an upturn in business with Iran coming to the markets. Both the aforementioned Barings Frontier Markets Fund, and the Templeton Frontier Markets have over 30% exposure to the Middle East & North Africa sector, much of which is in the financial sector, one of the largest sufferers of the sanctions program. This could offer some exposure to the potential uplift, without having to wait for direct investment.
However, while there is potential for future opportunities, there are still hurdles to overcome first. As with all emerging economies, there is inherent risk, especially as politics can change so quickly in these regions.
The primary aspect is that sanctions are still in place, and will be until 2016 at the earliest. There is also the language barrier to consider. The vast majority of company reports are in Persian, the native language, which could cause difficulty when trying to analyze companies. Furthermore, the currency is the rial, but prices are often listed in multiples of ten, known as the toman, making a sharp eye and division skills a useful quality.
Overall though, Iran could be a fascinating opportunity. It may be too early now for most investors, but it’s certainly worth putting on the radar for those prepared to take on the higher risk, but hoping to capitalize on the first mover advantage. This situation is almost unique, as the economy has been “emerging”, both in terms of infrastructure and intellectually for years, and as such, has the potential to make a new frontier in investing.
