Interested in a stock market trading on a price/earnings multiple of 5.35 and with a dividend yield of 13.7%?
A market that has less than 1% foreign ownership but could become the largest frontier market with a weighting of 20-25% in the next few years?
There’s a catch of course. It is very difficult for western investors to access Iran. But that could change as soon as this week, should negotiations in Vienna prove successful, wrote the Financial Times.
“Iran’s potential emergence from isolation could be the most significant opening of an economy since the fall of the Soviet Union and the US rapprochement with China,” says Shahin Shamsabadi, head of business intelligence for the Middle East and North Africa at The Risk Advisory Group, a consultancy.
Dominic Bokor-Ingram, portfolio adviser at Charlemagne Capital, a London-based emerging markets house, adds: “Iran has a $106 billion market cap, $100 million daily turnover and very advanced settlement, trading and custody systems. You won’t find another closed market anywhere else in the world with those characteristics.”
Foreign investors are paying attention, according to Radman Rabii, vice president for international clients at Firouzeh Asia Brokerage, an arm of Turquoise Partners, a Tehran-based investment house.
Rabii claims his company has hosted delegations from more than 100 investment groups since a negotiating framework was agreed in Geneva in November 2013, a process that has accelerated since a blueprint was agreed in Lausanne in April.
These include almost every big investment house running emerging market, frontier or Middle East and North African (Mena) funds, he says.
“The potential of Iran is so huge. As one of the last markets to be opened up to the world, it has so many potential growth opportunities,” Rabii adds.
Enthusiasts point to Iran’s diverse economy and stock market. Despite having the world’s largest combined oil and gas reserves, the hydrocarbon industry accounts for just 15% of Iran’s gross domestic product, which as of 2013 was the 18th largest in the world measured by purchasing power parity, at $1 trillion or $16,165 a person.
In contrast, oil accounts for more than half of the GDP of rival Saudi Arabia, although the divergence is partly due to the sanctions that have cut Iran’s oil production to 2.8 million barrels a day, from 3.6 million b/d in 2011.
With production costs of just $10-$15 a barrel, according to Turquoise, the easing of sanctions and return of western expertise and spare parts could boost production by 500,000 b/d within three to six months, according to Facts Global Energy, a consultancy, bolstering public finances.
Oil products account for just 6% of the market capitalization of Tehran’s 316-company strong stock exchange, however, which has far bigger exposure to chemicals, banking and base metals.
Rabii points out that Iran is the largest car manufacturer in the Middle East, led by two listed companies making their own vehicles and those of French and Chinese marques: Iran Khodro, which produces 850,000 vehicles a year, and SAIPA, with a capacity of about 600,000.
Turquoise and Charlemagne have already agreed to join forces with an equity fund aimed at international investors, which is likely to be launched as soon as sanctions are lifted.
Bokor-Ingram says Charlemagne has had a “huge amount of interest” from both individuals and institutional investors.
Assuming an agreement is reached and sanctions lifted, he sees the possibility of a “triple whammy” for equity investors from a strengthening currency, a rise in corporate earnings and a re-rating of the market to something at least akin to the 15x earnings of Saudi Arabia, which alone would mean a tripling of share prices.
“Given the structure of the market and the potential growth companies, it should probably be on 20 times,” says Bokor-Ingram, something he envisages could happen in the next three to four years.
He also sees opportunity in Iran’s local currency corporate bond market. Legislation dictates that these bonds are guaranteed by the bank that sponsors them, rather than the issuer, and they must pay a minimum interest rate of 20%, potentially attractive given that inflation is 14% and falling.
Bokor-Ingram sees the appeal of such bonds as part of the reason why Iranian equities are so cheap.
Shamsabadi identifies significant foreign interest, whether in the form of portfolio or foreign direct investment, in five industries: energy, aviation, automotive, banking and fast-moving consumer goods, particularly retail and food and drink.
“[At the moment] people cannot walk downstairs to a Starbucks or Pret. Every franchise company is looking to get its franchise in Iran. It’s kind of a race right now,” he says.
Rabii is confident that foreign money will start flooding in soon after any agreement is signed and the Swift international currency clearing system, which has been suspended in Iran as part of the sanctions regime, is reinstated.
“[The Iranian stock market] has less than 1% foreign ownership, compared to Turkey, where it is around 60%,” he says. “As soon as the Swift system reopens we will access a lot of money that has been sitting outside Iran waiting to come in.
“The Europeans [will be first]. A lot of them have continued doing business with areas that were not sanctioned by the EU. The Americans have been away almost 40 years now, so it’s more exotic for them.”
