Thomas Hugger, CEO and fund manager of Asia Frontier Capital, recently travelled to Iran to attend a conference.
AFC is an investment company headquartered in Hong Kong and Cayman Island.
The following is part of the travelogue he wrote upon his return, as reported by Seeking Alpha, a crowd-sourced content service for financial market:.
Having waited anxiously for three hours at the Dubai Airport for the final leg of my journey to Iran, I was eager to board the Emirates B-777 flight to Tehran. I was looking forward to forming my own impressions of the Islamic Republic of Iran, a country rich in history, crippled by economic isolation, and now attracting the interest of foreign investors in the wake of sanctions relief.
I was one of the few westerners on board. The plane was nearly at full capacity, and I saw Russians, Italians, Chinese, Koreans, and another Swiss compatriot, but no Americans or British.
After tasting my first delicious Persian meal, we began our descent from the 1 hour, 40-minute flight. We arrived at the small international terminal building. I knew this trip was going to be very different from my previous travels to conservative Middle Eastern countries.
I arrived on Friday, in time for the end of the weekend (Friday in Islamic countries is the equivalent of Sunday in the West). My arrival also coincided with parliamentary elections in Iran, whose results showed the alliance of reformists and pro-government forces secured all the 30 seats of the capital. This change is extremely positive for Iran’s future and the warming of relations between Iran and the outside world.
Visiting Iranian Bourse
Over the next few days, our host organized visits to Iranian companies from various sectors. Of course, we couldn’t visit Iran on an investment tour without visiting the bourse itself.
Founded in 1967, Tehran Stock Exchange is one of the two bourses in Iran. The TSE has 319 listed stocks, ETFs and bonds. The other exchange, Fara Bourse, was founded in 2008 and hosts approximately 300 stocks and has a market cap of around $20 billion.
With a market cap of around $120 billion, the TSE is similar in size to Vietnam’s and Pakistan’s exchanges. If Iran is to be included in any frontier index in the future, it will account for a major component (about 20% to 25%) of the index.
With daily turnover on the TSE of $100 million (this is expected to grow to $200 million) and only 0.5% of the outstanding shares currently being held by foreigners, these are the bourse’s early days with significant renewed foreign investor interest in this vast, oil-rich and strategically located country.
On the trading floor of the TSE, we had the chance to speak with the floor traders. Iran is an innovative country and according to the representatives of the TSE, it is expected that index futures and options will be launched in about one year (including the permission to short-sell stocks), something many frontier stock exchanges do not offer.
It must be also noted that all (share) trading in Iran must be Sharia-compliant, which is important for investors from Muslim countries.
On my last day in Tehran, I had additional visits with local banks and brokers to better understand the dynamics of business in the country as well as possible avenues for AFC to gain exposure to the opportunities that we see in Iran.
Last Frontier for Investment
I greatly enjoyed my four-day stay in “one of the last frontiers for investments”. The Iranian people were very friendly and particularly curious to talk to foreign visitors. I also enjoyed the great food and Iranian hospitality.
From an investment perspective, Iran is very different from most frontier markets because it already has a functional, deep and sophisticated stock market. Iran has existing businesses in all kinds of non-petrochemical industries, comprising 57% of the economy.
Iran also sits on the world’s fourth largest oil reserves and the largest natural gas reserves in the world. Despite its huge oil reserves, oil exports account only for 10% of GDP. From a demographic perspective, Iran is a nation of about 80 million people and its population is extremely well educated—Iran had the third most engineering graduates in the world in 2015 (233,695), which is only 5,000 less that the US.
About 73% of the population have a bank account, and there are currently 103 million mobile phones in use, of which 30 million are smartphones. When I visited a local supermarket, almost all of the products were locally produced.
As mentioned earlier in this report, the Iranian stock market has a market capitalization of over $140 billion, which is huge for a frontier market. With over 600 listed equities trading at an average P/E ratio of 5.6x and a dividend yield of 12.6%, the exchange is deep and very cheap. If Iran would be included today in the MSCI Frontier Index, its index weighting would be around 20% to 25%.
With the partial removal of sanctions, the reconnection of Iranian banks to SWIFT (which will hopefully occur soon), increased exports of oil, and the release of frozen assets, the Iranian government will be able to make progress in paying its creditors and kick-starting the economy.
There are certainly still considerable risks that remain and setbacks that could occur in the future, but given Asia Frontier Capital’s long-term view, we believe that now is the right time to invest in Iran to capitalize on the country’s enormous potential through investing in a first step, until the banks are reconnected to SWIFT, through Iran-dedicated mutual funds.
However, due to ongoing sanctions, only non-US investors can invest directly in Iran currently.
There are a few Iran dedicated funds (including Asia Frontier Capital) in the pipeline to be launched, but due to ongoing issues with money transfers into Iran, these funds will have to wait until this is resolved.
