Charles Robertson, chief economist at Renaissance Capital, a London-based investment bank, and author of The Fastest Billion met with the Financial Tribune in Tehran to discuss the possible effects of the lifting of sanctions on Iran.
He took stock of the possible opening of the Iranian economy and how that would relate to investment bankers, like him, who are interested in the country’s market.
“I don’t go to countries because I like them, I go to a country to assess the political risk involved, however in the case here [Iran], political risk is [only] related to the nuclear deal.”
Robertson went on to say that if there was no nuclear accord between Iran and the world powers then “all bets would be off.” His response shows the clarity of purpose at one of London’s leading frontier banks.
On how his overseas clients and partners view the current situation in Iran, he said, “Understanding the internal power dynamics of a country is all important when investing.”
However, he noted that not every company is enthusiastic about investment prospects in Iran and some have even strong biases against the country.
The reality, according to him, is that some need incentives and reassurance to realize investment potentials hitherto unknown to them in a way he has come to find out.
The next topic we delved into was the broader areas of potential investment.
“When looking at Iran, pensions become a large issue when discussing the future of the country.” The analyst recalled that when his company looks at a country’s risk factors, it also takes into account the supporting industries of the economy, such as pension funds, whether they are private or large state-funded bodies.
“Countries like Poland and Mexico have pushed their employers and employees -- with a small government contribution to invest 6.5% of taxable income into second-tier pension funds.” These countries have large pools of capital that can help long-term investment.
Moving on to the situation of Iranian banks, Robertson suggested that publicly available information was limited and this deterred investment.
“An area where I need research when coming to a country is the banking sector.”
He said one of the “problems” with the banking sector in Iran is the liquidity crisis which has seen banks’ lending resources erode significantly.
“Meanwhile, banks have opened numerous retail branches, which is three times more than in Turkey. And they classed that as profit as and when property prices increased.”
The Rouhani government has managed to put the economy back on track by changing the governor of the Central Bank of Iran, and brought in “sensible policies,” aimed at reducing inflation, the banker noted.
Relevance
“The short-term effect of these policies is a reduction in what was an inflated equities market and we may be seeing a similar trend in real estate as well.”
The Tribune then asked whether the current economic situation in Iran has any contemporary or historic relevance. Robertson referred to Sweden where in the 1980s they liberalized the economy, which allowed people to invest in foreign currencies and that led to a reduction in real estate prices by 70%.
The choice in Iran is to be able to accrue capital in the meantime, before a large shock to the system happens down the line. This can be done by selling off capital or shifting money into new areas.
The Tribune asked Robertson the total value of potential investments that could come to Iran. The response was that there is a large pool of money looking for new areas of investment.
“Within our network we have $25 billion of frontier equity funding, then you have a trillion dollars of emerging market equity, which may be interested in Iran.”
He added that the country is an ‘off-index bet’, which may be more appealing to people used to markets like Nigeria, or non-indexed countries like Saudi Arabia.
Pretty Exciting
On the timescale his company and many like it are planning to consider investment in Iran, he said,”We’re looking at the market when it hopefully opens up around December/January.”
He was asked about the general mood in financial centers like London and Frankfurt about Iran post-sanctions. “There is genuine excitement about Iran; one fascinating thing is no way will we see another country of this size coming on to the international market.”
Iran is the size of Turkey (in population), with wages which are more competitive than Turkey, he noted. “Equity investors are looking at [Iran] like they used to look at Saudi Arabia. Saudi Arabia was entirely closed until a few years ago. People think there is money to be made by investing in Iran as well.”
The paper then asked him about his thoughts on the future growth areas in the economy, and which investors would flock to the country first. “It depends on the investor group. The easiest investment for an investor will be a sovereign euro-dollar bond, which I assume will be next year.”
He went on to say there could possibly be some contrast between what the government in Tehran is looking forward to and what equity investors want, adding that equity investors are reluctant to invest in oil and gas or mining currently due to sluggishness in those sectors.
“This is due to low oil prices currently hovering around $55 dollars a barrel. For mining it has the lowest earnings per share, or the worst time since the 1930s Great Depression.”
He added that what investors are interested in are idiosyncratic stories about positive developments which are specifically good for their own reasons. “Iran may become a target country for where they [investors] wish to diversify their investment portfolio.”
The final topic was top-down economic reforms. Robertson said Iran didn’t have to force reforms like some former Soviet states, but acknowledged gradual change in policies and laws is visible.
“The country is pushing for reforms, with the removal of subsidies, the CBI tightening monetary policies, and the beginning of a normalized bond market. These are positive indicators.”
