WINNING the investment race to Iran.
Classified as an upper-middle income country, with a population of 78 million and annual output higher than that of Thailand or the United Arab Emirates, Iran is set to be the biggest economy to rejoin the global scene since the break-up of the Soviet Union over 20 years ago.
Following the recent nuclear agreement, investors in frontier markets believe that Iran has the potential to become one of the more developed markets available to them if it were opened up to foreign investment. Iran displays many of the characteristics of frontier markets, such as a diversified economy, young population and rising demand for consumer goods and healthcare.
International investment firms and consultancies are reporting sharp pick-ups in demand for Iran-related research from asset managers preparing to make the leap. There are already predictions of a $1 billion flow of investment into Iran in the first year after sanctions end.
The agreement has resulted in a number of international players taking action even before sanctions are lifted by setting up a sanctions-compliant fund dedicated to Iran, hoping to allow investors to take a position in Tehran's Stock Exchange.
With a market capitalisation of around $100 billion, about 500 listed companies and daily trading of $80 million to $100 million, the Tehran Stock Exchange (TSE) is currently trading at about 5.5 times earnings, against 10.5 times for the MSCI Frontier Markets index, and provides dividends in the low teens. Since 2008, the Tehran Stock Exchange index has risen from just below 9,000 up to more than 64,500, an astonishing rise of over 600 per cent. As with several emerging stock markets, the TSE historically set a number of limitations on foreign investment. With the growth of Iran's stock market and the development of the economy, the stock market authorities have gradually relaxed these limitations.
Others are also getting ready to invest, but worry that a dedicated country fund carries too many risks at this point. Instead, they are aiming to invest in Iranian shares, once the sanctions are lifted.
Private equity firms are likely be early movers, either taking direct ownership stakes in companies or providing financing to businesses looking to expand to take advantage of the young and well-educated populace. That is likely lead to more corporate bond offerings once the country is fully open to international investors.
In the short term, with issues of access and other trading logistics yet to be worked out for direct investments, international companies already doing business in Iran will stand to benefit. Companies involved in the energy, automotive and hospitality sectors are seen as the most primed to benefit from the lifting of sanctions. Iranian foreign trade is also predicted to increase from the existing $80 billion to $200 billion by 2020.
Potential pitfalls for investors include state involvement in the economy, which includes price controls. There is still state involvement in many sectors, but the trend of liberalisation is growing quickly.
The stock exchange can be volatile and in some cases illiquid, as is the case with other frontier markets, but it does have a separate regulator and central depository.
There are also problems with corruption, which President Hassan Rouhani has identified as a significant risk to economic growth. Rouhani is seeking to carry out a series of social and economic reforms to eliminate the existing problems.
Despite these obstacles, both emerging and frontier markets managers are expected to move rapidly if sanctions end, although it would take time for indices such as the MSCI Frontier Markets index to add Iran.
In devising investment strategies and plans for Iran, it is highly recommended to make use of reputable local consultants who can add significant value though their local knowledge and experience.
MEHRDAD PARHIZKAR, PARTNER, FRONTIER PARTNERS
Mehrdad has 25 years of consultancy experience gained in the UK and Iran. In Iran, Mehrdad has advised many multinational clients on the identification of investment opportunities, market entry and risk management strategies as well as local partner selection in relation to emerging markets.
ABOUT FRONTIER PARTNERS
Frontier Partners is a specialist professional services firm providing Consulting, Financial Advisory, Transactions Support and Investment Services to multinational corporations and diversified conglomerates with respect to their entry strategy into Iran. Official website - www.frontierpartners.co
[c] 2015 CPI Financial. All rights reserved.[c] 2015 CPI Financial. All rights reserved. Provided by SyndiGate Media Inc. ( Syndigate.info ).