Over the weekend, one of the largest closed emerging markets became more accessible to foreign investors as financial sanctions were officially lifted. The ‘implementation day’ came somewhat sooner than expected following last year’s breakthrough deal between Iran, the United States and other world powers which centred around Iran’s nuclear programme.
Emerging and frontier market fund managers are now looking more closely at Iran to evaluate its investment potential, as shown by the rapidly growing number of Iran-focused funds as well as the increase in investor travel to Tehran during the last six months. The Tehran Stock Exchange already has a large, diversified and liquid stock market with more than 400 listed companies, and a market capitalisation of about $90bn, with favourable trading valuations (PE of 5.6 vs EM average of roughly 12.2). Aside from oil (which accounts for roughly 18% of Iran’s economy compared to 50% in Saudi Arabia), services, agriculture, manufacturing and mining are key drivers of domestic growth. Analysts also point to the country’s large IPO pipeline (potentially close to $100bn, largely due to the government’s privatisation programmes) which has been kept on hold and largely out of the reach of global markets due to the sanctions.
Despite the developments, inflows are likely to be slower than some expect as foreign investors (particularly internal compliance teams within these institutions) gradually build up knowledge and confidence in a market where investor relations and corporate governance standards are somewhat behind to say the least. And then there is also what some have called “snapback risk”, i.e. the possibility that sanctions are re-imposed, potentially trapping investors.
Iran’s potential impact on emerging and frontier market indices is as promising as it is uncertain. But no doubt many investors will be looking to learn as much as possible about this new market and its companies.