Sanctions over, time to invest in Iran

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Sanctions over, time to invest in Iran.  Welcome back Iran.

UN sanctions against Iran were lifted on Jan 16; the most stringent sanctions ever imposed on a country.  While there has been a significant thaw in relations between the US and Iran; much work remains to be done in order to remove the most stringent of American sanctions.

In any case, investment in Iran will increase significantly in 2016; FDI is projected to rocket this year.  In previous years, FDI has been range-bound since 2007, between $2bn and $4bn per year.  The narrative goes, that Iran has been in desperate need to renew its capital stock for many years.  In addition to using investment to improve efficiency; the country’s young demographics will compel investment intended to capture the spending of Iran’s youth.

There remains, as ever with Western Asia (Iran, Afghanistan and Pakistan are not and never were a part of the Middle East), a significant risk that political actions erode the optimism and momentum that currently prevail, but if you invest in Frontier Markets you by nature, must be an optimist.  This post focuses on the positive momentum that has been fomented by the removal of UN sanctions.

The most recent comparison to Iran would be Myanmar, a country that had been sanctioned heavily between 1962 and 2011.  Myanmar, despite the removal of sanctions and the institution of a democratically-elected government remains a country fraught with issues borne from a legacy of authoritarian rule as well as the emerging extremism of the Buddhism practiced in Myanmar; this has led to the persecution of minorities that is in many ways similar to Iran’s treatment of Zoroastrians, atheists, and Baha’i adherents.

Both countries are geographically diverse, richly-endowed with natural resources and similarly large populations.  However, this is where the comparisons end.  Myanmar never had institutions in much of its territory, and remains significantly under-developed relative to Iran which is by many measures almost a developed-country.  Iran has been a global power for most of its history (which is almost as long as the world’s history); it has well-developed institutions, infrastructure, and industry as well as a successful and thriving stock exchange.  Iran also has won of the world’s largest diasporas with The table below highlights some of the key information about Iran.

Population 78mm (17th most populous)
GDP (PPP) $1,015bn (18th largest)
GDP per capita (PPP) $12,833 (72nd highest)
GDP (nominal) $420bn (29th largest)
GDP per capita (nominal) $5,306 (98th largest)
Literacy 87% (90th highest)
Life Expectancy 75 (ties for 67th highest)

Over 40% of the population is below 24 and is educated.  This demographic and their associated needs and wants is what makes Iran interesting.  Iran has 12 metropolitan areas with over 1mm people with 6 cities that we would consider global cities with strong potential for economic growth; Tehran, Mashhad, Isfahan, Karaj, Tabriz, and Shiraz.  Despite sanctions, all of these cities have well-developed infrastructure, including mass transit and airports with spare capacity.  Tehran is certainly overburdened, but no more significant than what you would see in any rapidly growing or developing city.

 

The table below provides some key facts about Iran’s economy.

Public Debt $10bn
Foreign Reserves ~$100bn
% of population living below $11/day 18%
Unemployment Rate 10%
Imports $100bn
Exports $60bn
Major import partners UAE China Algeria India
Major export partners China

India

Turkey

Japan

Non-energy related exports only total about 30%; the Government’s recently released 6th Economic Plan (2016 – 2020) focuses on reducing this by boosting the development of science and technology.  Having access to a global supply of parts should help this objective.  Iran’s domestic auto manufacturer, Khodro ($12bn per year in revenue) has a number of agreements lapse in 2012 with heightened EU sanctions; that is set to change, with Peugeot poised to begin joint-assembly lines later this year.   Iran’s airlines have planes held together with duct tape; this has constrained the growth of air travel for both domestic flights and international flights.  Iran is set to purchase over 100 Airbus jets and is intending to also purchase Boeing jets, if Boeing is able to get permission.

Iran’s new 6th year Plan also puts an emphasis on defense.  Iran is in an unstable region with its Western neighbours (the Gulf countries) set on its demise.  One particular area of focus is maintain the security of Iran’s IT systems; these systems are said to be regularly attacked by Israel.  This expenditure should, if it is well-executed, assist in fostering a conducive environment for the development of technology businesses.

Other than external threats, Iran’s main challenge is finding satisfying, fulfilling work for its large and well-educated youth population, as well as now coping with the current level of energy prices.  The removal of sanctions allows Iran’s businesses to access over $30bn in funds held abroad, and the government will be able to access approximately $100bn invested abroad.  This alone should provide a boost for 2016 and 2017 that offsets the decline in oil prices.  If oil prices remain low beyond 2017, this poses a significant issue for the country’s growth.

Iran’s stock exchange, the Tehran Stock Exchange was started in 1967, and by 2000 all trading was automated.  There is no margin or lending offered, and is unlikely to be offered in the future.  Key facts about the equity market are shown below.

Trading Days Saturday – Wednesday
Trading Hours 9AM – Noon
Settlement T+3
Trading Cost 50bps (one-way)
Online Brokers 85
Companies Listed 316
Market Cap $95bn
Maximum Foreign Holding 20% of a company

 

For more information on the market, we would highly recommend you check out the Tehran Stock Exchange’s guide.  There is a lot of information available on the market and individual listed companies in English, so you can get a fair amount of information on the companies within Iran.  Investing in Iran’s equity exchange as a European is now possible; it will soon be possible for Americans and Canadians are unlikely to remain far behind.  In a later article we will focus on how an investor may access investment in Iran.

Our sources tell us that Bloomberg included all information on Iran’s securities and market, but it is not accessible due to US sanctions.  With the removal of these sanctions we would expect Bloomberg to provide access to a wealth of data on the market.   This is a diverse market with enough diversification within the exchange to be able to invest through all market cycles.  There is already a London-listed ETF, if you are interested.

The intent of this post was to pique your interest on Iran.  We will follow-up with more details and information that may be useful to you.  If you have any questions, please let us know.

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