Review of BCG’s Asset Management Survey

We had a chance to take a look at the Boston Consulting Group’s annual asset management survey which landed on our desks last week. Each summer the consultancy takes a fairly deep dive into the industry’s overall state of health and reviews its overall performance, as well as discusses emerging products and competitive trends. A few things we found particularly interesting:

  • For the first year since the 2008 financial crisis, revenue earned by asset management firms fell globally in 2016 along with profits. The biggest squeeze in margins come from those ‘in the middle’ i.e. from asset managers without large scale or a niche focus.
  • Global assets under management increased by 7 percent to $69 trillion, however most of that growth came from rising markets rather than new inflows which held steady throughout the year.

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  • One area of growth area that particularly stands out is China, where the asset management industry is still relatively underdeveloped. The country’s assets under management increased 21 percent in 2016, mostly driven by net new inflows. Rising levels of household wealth, along with the development of insurance companies and pension funds, offer the potential for further gains in the coming years. Foreign companies, for whom the barriers to entry to the Chinese market are gradually disappearing, could stand to benefit from this trend.
  • Passive strategies were the largest driver of net fund flows in the US, where the industry is dominated by a few large players (the top 10 firms captured almost all of the inflows). This ‘winner takes all’ trend was less pronounced on the active side of things, where the 10 top firms captured 58% of net inflows.
  • Despite the faster growth of AuM in passive products, passives’ contribution to managers’ revenue pools “remains small.” Revenues from passive mandates grew from about $6 billion in 2008 to $14 billion in 2016, which only represents 6% of the industry’s global revenues. Even though various forecasts suggest passive investments could overtake active by 2021 (in terms of AuM), revenues will likely only reach around 7% of total revenues during the same period.
  • The asset class that has proved to be the most stable during the last few years is alternatives. Even though alternatives only accounted for 15% of AuM in 2016, they made up 42% of total revenues. The next two strongest contributors were active specialties as well as solutions and multi assets.

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The survey concludes that growth in the industry is still possible, however only through a combination of M&A, cost management, and crucially, technology innovation.

Is Tehran Stock Exchange Index truly representing the overall market behavior?

This is a common question asked multiple times by market practitioners and observers of Iran’s capital market. This is essentially due to the asymmetry readily witnessed by those who buy and sell stocks of companies listed on Tehran Stock Exchange (TSE).

Indeed, there are occasions when mixed signals are communicated by the All-Share Index if you happen to make professional investment decisions based on interpretations of the benchmark index.

For instance, you might see in one typical session of the exchange market that the gauge is in the red zone by about 300 or 400 points down but there are many sectors across different market boards that are experiencing gains rather than losses in price in spite of the general negative environment usually seen under such circumstances.

In one recent study performed by Armin Sadeghi Adl, Tehran Stock Exchange Company’s expert at Research Management Division, he underlined the fact that there is a meaningful diversion between two major indexes used to quantify the general behavior of the equity market namely, value weighted index—being constantly blamed for its shortcomings to illustrate the true performance of the market—and equal-weighted index, which was introduced just two years ago to the market activists and researchers.

As Mr. Adl explains about his research in his article, published by the well-reputed economic Daily, Donya-e-Eqtesad, he assures us that value-weighted Index or locally known as Overall Index does not genuinely illustrate the reality of the market since this measure is initially composed of weight of firms based on their market cap size, which is very misleading. This is because of the calculation measures employed to specify the influential companies on the Index.In In fact, the number of listed companies allowed to be included in this computation does not exceed 17 from 321 ones present in TSE. Additionally, their market cap goes beyond 50% which is in stark contrast to the 10%, belonging to  just 231 companies.

Thus, this is to say that TSE Index is impacted by small fraction of giant names. Consequently this is not a guiding element to those who adjust their investment decisions and strategies solely by such an indicator, according to Mr. Adl.

In the same vein, the equal-weighted index was introduced in 2014/15. From the time this measure first used till the first two months of current Persian Calendar, it showed a solid 33.5% growth.

Meanwhile the Overall Index registered 8.1% dip. In other words, unlike the down cycle perceived in the market throughout the period, there existed lucrative opportunities for those individuals to forego the false signals emitted by the Index and achieve acceptable and at times unexpected returns.

Statistically speaking, in the first quarter of the current Iranian year, while the Index went down by about 9.5% and the average return resulted by 17 big cap companies dropped by 10.2% (with a market cap of above 50%), there were 131 firms in the exchange market with positive returns.

It is noteworthy to say that small cap entities recorded 21% of stock trades in the same period which is a telling testimony to the claim that the market participants were ignorant of many other names in the market.

It is also good to know that many of the giants in the capital market of Iran are notoriously labeled as “index builder” as they they are the driving forces behind market downs or ups.

To shed more light on the matter, let’s take the largest  and smallest names present in TSE as an example for the sale of clarity.

Persian Gulf Petrochemical Company which enjoys 8.4% share of total market cap and Tehran Derakhshan Company with a meager 0.003% stake of the whole market are the largest and smallest  companies in Tehran Exchange Market. As it is self-revealing, we can understand the big difference a factor such as  market cap can exert on Overall Index swings.

This is why someone who is interested in investing in the exchange market of Iran should not allow themselves to get misled by following Index movements in either directions. Rather, interested individuals should enter the market with open eyes and ample knowledge of the dynamics and fundamentals of the market.

Moreover, when studying the first quarter performance of the TSE, what actually surfaces is that most investors were unluckily focused on surprisingly just 16 names out of 321 ones available for investment in the market, according the research finds by Mr. Adl. It was so much so that half of the value of trades were single-handedly won by the big names across the market.

Moreover, turnover ratio for most traded shares has a lot to tell us. According to Mr. Adl, half of these firms experienced more than 100% turnover ratio. In other words, their shares had changed hands at least once in the market during the period.

As a live example, we can name Saipa Investment Company, with minus 9.8% return in the period. This company had the highest  share turnover ratio among the list of 16  companies most favored by the market participants. Nevertheless, the average for this ratio was 99% among  big cap firms in the equity market.

Nonetheless, the aforementioned companies’ loss ranged from minus 3.3% to minus 43.9%. The average was minus 23.5% in the period, however.

All in all, it appears that although the Tehran Stock Exchange did not pass upbeat trading sessions on the whole in the last quarter, it is evident that there are big opportunities out there. Therefore, it is the investors themselves and not just the investment environment to point the finger of blame at for the low or negative returns realized.

P.S.: All tables are taken from Donye-e-Eqtesad, published 2 August,2016


This is a guest post written by Navid Kahlor, Freelance Contributor at Al-Monitor. The original can be found here.

Key takeaways from FundForum 2016

Earlier this week, over 2000 global investment and wealth managers came together at the annual Fund Forum in Berlin to discuss the main trends affecting the industry. Although the scope of the discussions was broad, there were a number of topics which were at the heart of many of the debates and conversations throughout the 3-day event.Here are our top 5: 

Robo-advisors and technology

Tom Brown, Global Head of Investment Management at KPMG, segmented the issue of technology and digital disruption in the asset management industry into three main areas: customer experience, operational efficiency and the use of technology to manage money.

Robo-advisors – online wealth management platforms that provide automated portfolio management advice without the use of human financial planners – are perhaps the industry’s best example of all three points rolled into one. While the technology is still relatively new, use of robo-advisors has been growing exponentially, especially amongst the younger generation, which today prefers to view and manage its pension savings using a mobile app rather than going into a bank branch.

A number of traditional asset managers have equity stakes in robo-advisory platforms, aiming to strike a balance between traditional and technology-based approaches under the umbrella of an established, credible brand name. Others argue that artificial intelligence and machine learning will eventually lead to the demise of the fund manager entirely, the argument being that machines can do what humans can do but better. Consumer behaviour will adapt to the new environment as it always has done when presented with innovative leaps forward such as self-service checkouts, online interactions and soon, driverless cars.

Blockchain

In October last year The Economist devoted their cover story to Blockchain: “The trust machine: how the technology behind bitcoin could change the world”. In simple terms Blockchain is a digital, trusted, public ledger that everyone can inspect, but which no single user controls. It keeps track of transactions continuously, for example ownership of a diamond, rare painting, or piece of land.

The asset management industry continues to debate the potential applications of this technology, which started out by powering Bitcoin. In a panel moderated by Lawrence Wintermeyer, CEO of Innovate Finance, ideas ranged from Blockchain’s applicability in areas such as post-trade environment, collateral and liquidity management, regulatory reporting, and the handling of know-your-client (KYC) and anti-money laundering (AML) data. In each instance success will require close collaboration amongst the various parties involved.

Brexit and Trump

Mohamed El-Erian, Chief Economic Advisor at Allianz, addressed some of the shifts that are giving rise to the anti-establishment movements seen in many developed countries today.

“The common element throughout all these things,” he explained, “is that the advanced world has lost the ability to grow in a fair and inclusive manner, and when that ability is lost and people lose confidence, things start going wrong.”

El-Erian stressed that global growth to unlikely to be consistent and stable any time soon, thus the risk of non-normal distribution of events affecting the markets is always an issue. Secondly, he highlighted central banks’ inability to rein in financial volatility, which remains as frequent and unpredictable as ever.

The discussion centred on the fact that investment managers should try to adopt new framework about how they think about risk, and acknowledge that market events in both developed and emerging markets no longer follow a normal distribution curve.

Is ‘data’ the new gold?

A number of panels focused on the industry’s ability to understand and utilise the unprecedented amounts of data that are generated by each one of us in the digital world.

“By 9 o’clock each morning we have already created more data than mankind created from the beginning of time to the year 2000” said Andreas Weigend, former Chief Science Officer at Amazon.

“Because of the signals you send through sensors, microphones, GPS, gyroscopes and cameras, your phone knows almost everything about you: where you are walking and even how you are walking – it probably knows more about you than know yourself”.

Crunching and refining data such as these enables the industry to improve and tailor its products a lot more to client needs.

Costs and Transparency

The new European MiFID rules are due to take effect in early 2018 and will require funds to give more information on costs in their fund factsheets.

EU and UK regulators are demanding fairer and more transparent fees from fund managers in a bid to ensure greater transparency and accountability to investor clients. As discussed in previous blogs, as part of this process they are also assessing which costs should be borne by the asset manager and which can be passed on to the end client through management fees and commissions.

The new regulatory environment is forcing asset managers to rethink a number of elements of the traditional business model, such as how they consume and pay for investment research.

With technological innovation comes regulatory oversight. Those able to react quickest to the dual challenges of new regulations and market unpredictability are most likely to succeed.

Conference website

Full agenda

MSCI says no to China

Last night, MSCI, the world’s largest indexing firm, announced that it will not be adding China’s A shares as constituents of its widely followed EM index.

It has also made a number of comments which were of interest to global emerging funds following Pakistan, Nigeria, Argentina and Saudi Arabia.

In summary:

1. For passive EM funds, the MSCI EM index is the most significant globally by far, with around $1.5 trillion of indexed investment. For active investors, any change in the weighting of the index (which they are benchmarked against) forces them to reassess the composition of their portfolios.

2. MSCI pointed to a number reasons behind their decision regarding China’s A share market, the main one perhaps being capital mobility. First and foremost, the monthly repatriation limit (the amount of his total capital the investor is able to withdraw from the market during one month) of 20% is considered too low, especially should the fund be faced with redemptions. The time-consuming and opaque process of receiving approval for a quota (allowing investors to invest in Chinese stocks) is also a factor. On top of this, the need for preapproval of financial products on foreign stock exchanges that are linked to A-share indices has not been yet addressed.

It is important to note that China is already the largest component of the MSCI EM Index, making up over 25% of the index. This is made of up of ADRs of Chinese companies listed in NY or Chinese shares quoted in Hong Kong. The domestic (A-share) stock market – the largest in the world after US – is not included in the index.

3. MSCI announced that Pakistan will be reclassified as an Emerging Market. Given its current account deficit and need for capital to drive steady growth, many observers agreed that Pakistan was the biggest winner from yesterday’s announcement.

4. Argentina will be reviewed for a potential upgrade. In December 2015, the Argentinian Central Bank abolished foreign exchange restrictions and significantly relaxed the capital controls that have been in place for a number of years. These changes have resulted in a floating currency, the elimination of cash reserves and monthly repatriation limits on the equity market, as well as a significant reduction in the capital lock-up period for investments.

5. Nigeria may be removed from MSCI’s Frontier Markets Index and reclassified as a stand-alone market due to capital mobility issues. This may even come as soon as November this year. Early last year its Central Bank pegged the local currency to the US dollar resulting in a sharp decline in liquidity on the foreign exchange market. Hence, the ability of international institutional investors to repatriate capital has been significantly impaired to the point where the investability of the Nigerian equity market is being questioned.

6. MSCI said that it welcomes the recent market enhancements announced in Saudi Arabia, which opened its market for the first time to foreign investors last summer. These include changes to the rules for qualified foreign investors, settlement cycle of listed securities, elimination of the cash prefunding requirement and the introduction of proper delivery versus payment. Many of these are on course to be implemented by mid-2017 and will bring the Saudi equity market closer to EM standards.

Sources: MSCI, FT, Natixis

Technology’s potential to ‘emerge’ markets

Earlier this year, one of the largest remaining ‘closed’ emerging markets, Iran, followed Saudi Arabia in opening up its stock market to foreign investors as financial sanctions were officially lifted following last year’s breakthrough nuclear deal between Iran, the US and other world powers.

Emerging and frontier market fund managers are now looking 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 capitalization of around $90bn. On top of this, the country’s IPO pipeline is potentially as large as $100bn, an enticing prospect for international investors looking for growth opportunities.

Before they are able to invest substantially in Iran, investors must first satisfy internal compliance teams by getting to grips with a market where investor relations and corporate governance standards still have a lot of catching up to do. This is usually a long and fairly painful process as investors, companies and regulators move at different speeds, speak different languages and follow different practices.

Technology could play a vital role in helping companies in countries who are entering the global capital markets arena for the first time, such as Iran and Saudi Arabia, to integrate and engage with the international investment community. It’s probably fair to say that the success of technological innovation in this area will be based largely on its ability to help companies to level the playing field between global investors and local investors.

The investor relations community has been slow to embrace innovations which are already revolutionising other industries. A Google Street View of the Emirates Airbus A380 for example gives travellers a full virtual product tour of the plane from their desks. Bernie Sanders used the 360 interactive video to great effect at his rally in the run-up to the Iowa caucus.

For most fund managers, there is no substitute for a face-to-face meeting or a company site visit, during which they can see the whites of management’s eyes and walk around the corridors of the company’s headquarters. But as global portfolios become more and more diversified, technology could help investors to cover more ground by increasing the effectiveness of ‘remote’ engagement at a fraction of the cost. Forward-thinking IR teams could adapt 360 technology to enable analysts and investors to interact not only with company premises, but also with senior executives and product managers. In a few years, the Oculus Rift headset could take this idea a step further to provide an even more immersive experience.

Simple smartphone applications allow ordinary consumers to order taxis, find dates, book flights, order takeaways and operate their central heating from the office. They allow warehouse managers to control stock and doctors to monitor patients’ blood pressure. At the same time, IROs and fund managers still rely heavily on emails, phone calls and business trips to conduct most of their daily tasks, which require time, money and organisation. In this environment, it is perhaps unsurprising that the process of building knowledge, trust and confidence in a company or market takes as long as it does.

For innovation to be embraced, it must make the fund manager’s job more efficient without forcing him to surrender his competitive edge or limiting his access to the company in any way. It must help the IRO to tell the company story more efficiently and to a wider audience. The opportunity for such a solution is perhaps greatest in emerging and frontier markets given the lack of existing IR infrastructure and desire for short-term international growth. Despite still being relatively undeveloped from a global capital markets point of view, countries such as Iran, China and Indonesia boast increasingly tech-sophisticated consumer markets, which perhaps bodes well for their respective corporate counterparts.

Technology innovations could offer open-minded IR teams in emerging and frontier markets a unique chance to quickly close the gap between them and their richer, more experienced developed market rivals. The lack of an existing process for engaging with international investors may even give them an advantage over established companies reluctant to think outside the box and adapt.

This article first appeared in the spring edition of UK IR Society’s magazine ‘Informed’.

How EM Investors View Russian Equities

Key Points

  • Global EM investors are increasingly looking beyond standard MSCI index constituents in Russia in search of value.
  • Average investor allocation to Russia is 3.76% marginally higher than the MSCI benchmark allocation (3.42%), however with a higher deviation from the average than other emerging markets.
  • Sector focus in Russia is shifting away from traditional areas like oil & gas and mining towards new areas such as retail and technology. The opportunity for stocks outside traditional sectors to capture institutional investment is perhaps greater now than at any point in the last 5 years.
  • A well-structured methodology for proactive targeting of investors can help IR teams to take advantage of new opportunities.

Emerging Market Fund Analysis & Methodology

This blog is written in conjunction with Copley Fund Research, an independent research firm which analyses the holdings of a specific sub-set of institutional equity investors.

In this case we are focusing on a cross-section of 120 actively managed global mutual funds, which invest a combined total of over $250bn in emerging market equities.

These funds use an index (usually the MSCI Emerging Market Index) as their performance benchmark but have complete discretion over portfolio allocations amongst global emerging market companies. As such they provide a good indication of buy-side sentiment towards countries, sectors and individual stocks in emerging markets.

Here we highlight some of the key trends in their fund allocations, analyse the overall pattern of investment in Russian companies and look at some of the top EM Funds that might be of interest to Russian IR teams.

Russia: Today’s Investment Landscape

According to public data, at the start of January 2016 Russian equities made up 3.42% of the MSCI Emerging Markets index, representing a combined total of more than $1.7 trillion in passive and active investments by over 1,100 institutional investors globally. Despite recent outflows and transaction sanctions imposed by Europe and the United States, investors from these geographies continue to hold the lion’s share (>75%) of institutional investment in the Russian equity capital market.

Geographical Distribution of Institutional Equity Investors into Russian Equity Market (2015)

Russian Equity Investment Trends

Following a steady increase in equity investment in Russia between 2011 and 2013, the market was badly hit by the global commodity price depression and the uncertainty caused by the Ukraine conflict and associated trade sanctions. Russia is now the 8th most popular emerging market by average portfolio weight, having been overtaken by South Africa and Mexico during the last few years.

The macro economic factors affecting Russian investment have far outweighed the micro factors, with some institutions forced to close Russia funds entirely to satisfy risk managers and internal obligations.

However, the downward trend may now finally be reversing, as many funds increased their Russian equity allocations during the second half of 2015, positioning themselves as overweight versus the MSCI EM index. Should this trend continue, 2016 may well reward the more optimistic IR teams who anticipate growing interest in their company story and plan accordingly.

Distribution of Investment in Russia

The current distribution of Russia holdings can be seen in the chart below, with wide ranging levels of allocation amongst the 120 funds. The average allocation of 3.76% is marginally higher than the MSCI EM index benchmark allocation of 3.42% – and still higher than the percentage allocated to either Turkey or Poland – indicating a moderately bullish stance on Russia at present.

Taking Advantage of Investor Opportunities

Following the 2008 credit crisis, investment in Russian equities reached its peak in December 2013. As stated above, a large number of investors subsequently either reduced or sold off their positions as economic conditions worsened. Should this situation turn around, these investors could prove particularly interesting for companies, given their history of interest in the Russian market. It’s certainly worth companies keeping track of investment patterns to understand the likely impact of a change in market conditions and take advantage of potential opportunities.

2015 Activity

The chart below shows the funds who have increased exposure to Russia the most over the course of 2015. Schroder’s EM Opportunity Fund tops the list, followed by Lazard’s Developing Market Fund. All of the funds listed below have a shown a willingness to invest in Russia when others have taken a more cautious approach.

Sector focus

During the last few years investor appetite has switched more and more towards the technology and consumer sectors and away from oil and gas, in line with other emerging markets. Russian oil & gas stocks made up nearly 3% of EM portfolios back in January 2011 but now account for under 1.2%; food retail stocks have nearly doubled from 0.47% to 0.82% over the same period.

From a stock perspective Magnit, Lukoil and Sberbank are the most widely held in Russia; each is owned by around 50% of funds and together they account for around 46% of total holdings in Russia.

New Emerging Market Opportunities

EM active investors are more than willing to invest outside the benchmark index where the opportunities arise. Stocks such as Yandex, X5 Retail and Mail.ru are not included in the MSCI benchmark but have attracted over $1bn in investment from the active EM funds in our analysis.

This shows two things: firstly that just because a company’s stock is included in the MSCI EM index doesn’t automatically mean that active investors will invest, and secondly that the MSCI EM index isn’t a barrier to attracting investment from international EM funds. This should encourage companies outside the MSCI Emerging Markets index to engage with global EM active investors as they have a clear mandate to look beyond benchmarks in order to generate excess returns.

Focus List

Based on the analysis above we recommend the 39 global emerging market active funds listed below should be on the radar of Russian IR teams. These funds are selected on the grounds of either their current allocation in Russian equities, increased Russia allocations over the last 12 months, and/or a history of high allocations in Russia over the last 5 years. As such they will have a greater propensity to invest in high quality companies throughout the region.

A Framework for Investor Targeting

Investment profile of my company

The starting point of any investor targeting exercise is to build a solid understanding of how your company’s story can fit into criteria that global investors look for when screening for companies: liquidity, key fundamental metrics and non-financial highlights.

Things to consider:

  • Does my company’s liquidity, or average daily trading volume (ordinary shares and depositary receipts combined) meet institutional investor requirements? Minimum threshold for large institutional investors is on average $1million+ per day. Smaller funds or those focused on the mid-/small-cap segment of the market often have more flexibility, however also tend to have fewer resources and less support (corporate access, investment research) from brokers.
  • Compared to the regional and broader EM peer group, which set of fundamentals particularly stands out in my equity story?
  • How are we positioning our collateral to address the needs of investors with particular strategies (e.g. Income/Yield, Growth, Value etc)? Do we have a good understanding of the triggers of the investment decision on those funds?
  • What are the key non-financial metrics that matter in my story? What macro- or mega-industry trends is my company’s equity story continually benefiting from?

Opportunity Analysis

Many companies take a technical, if not scientific, approach to identifying investor opportunity. A starting point is to conduct a comprehensive analysis of your own shareholder base, factoring in significant movements over the past four quarters.

Next, an institutional investor study draws up a target investor groups based on a number of criteria:

  • Investors who are already present in my shareholder register
  • Investors who are invested in my peer group but not in my company
  • Investors who have held my company’s shares previously but do not currently hold them
  • Investors who have been increasing allocations to my region and/or my sector
  • New EM funds launched globally over the last 12 months
  • New ideas of investors from brokers and other consultants

Things to consider:

  • Do I have a clear understanding which investors with active mandates hold my regional and international peer group? How often am I monitoring changes and activity in this list? Are the changes in line with what we are seeing in our shareholder base? If not, what are the drivers of the outliers?
  • Am I monitoring developments in the passive and ETF industry and do I understand which benchmarks my company is part of? What are my company’s allocations to each of those indices?
  • How often am I monitoring broader fund flows into my region and comparing this to what we are seeing in my company’s shareholder base?

Segmentation

Following this, companies often group investors into tiers, which then dictate the outreach strategy for the year. For illustration purposes the following example may be helpful:


All investor tiers have access to ‘passive channels’ which include IR website/web casts, annual report, IR mailings / press releases, IR events (R&D day, etc.), quarterly conference calls, event-driven/product conf. calls, phone & email contact with IR

The study can then be applied to three key geographies: Europe, North America and Asia.

Summary

In summary, Russian allocations in EM portfolios are increasing but from a historically low base.  In order to capture a share of these allocations, it might benefit IR teams to keep track of those funds with a history of investment in Russia. The opportunity for stocks outside the traditional focus of oil & gas to capture institutional investment is perhaps greater now than at any point in the last 5 years. Our targeting framework can be applied by listed companies to proactively target new opportunities.

We hope it is useful and are happy to provide additional information and answer any questions.

Steven Holden
Founder
Copley Fund Research
steven.holden@copleyfundresearch.com
www.copleyfundresearch.com
+64 9 445 4350

 

Michael Chojnacki

Chief Executive Officer
Closir Ltd
michael.chojnacki@closir.com
www.closir.com
+44 792 0729 329

Iran’s Stock Market Opens to Investors as Sanctions are Lifted

Jame-mosque-of-Yazd-Iran-wallpaper

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.