The First Foreign Investors in Iran’s Equity Market

Isolation, sanction, mismanagement. These are the most potent sum-up for Iran’s economic development in the past three decades; but every cloud has a silver lining. Right now, there is less than 1% of Iran’s Equity market which is owned by foreigners. So what do they see as the opportunity?

Despite sanctions, high inflation, and colorful politics, Iran’s equity market has quietly returned a compounded annual return of 18% in USD over the past decade. Moreover, to the surprise of outsiders, Iran during this time has been on a privatization bonanza; where the state once represented over 80% of GDP, it now represents less than 40% (excluding ownership of related organizations). These advancements happened in isolation, undoubtedly a better connected Iran could leave much to the imagination.

It’s not a one way street as corporate governance remains poor, and analyzing the complexity of the role of government in the economy is no easy task. Fortunately, this has been evolving though for the better, as the new administration has adopted more market oriented policies. For example, detergent powder was heavily subsidized from the previous administration, creating 30% overcapacity, resulting in pricing wars, producing little industry profit, and eventually causing the bankruptcy of many small players. The subsidies were removed this year, transforming the setback into an opportunity to consolidate the industry and, more importantly, signal companies to begin brand building. One of these market leaders is already on track to spend over 6% of revenue on advertising and promotions, three times more than it has ever spent in any given year! This shift in public policy has resulted in a competitive environment more like those in developed markets where increased disclosure and brand value are assets. Across the industry, there is a shift in mentality from being an isolated “producer” to creating shared value as a market “brand owner.”

The positive shift in public policy is not just at the market level, but also at the institutional level. One of the notable ones is Iran’s Security Exchanges Organization (SEO), which has implemented reforms to increase accountability of management teams, and protect rights of minority shareholders. Historically, delays or defaults on corporate dividend payments were the norm until recently when the SEO began enforcing hefty penalties on non- compliant companies. We heard many grumblings from local companies about the heavy hand of the SEO now.

Besides addressing operational issues, SEO has renewed its support for global visibility of the market with increased efforts to add English language translations to their corporate financial database. Although the SEO is regulating a sanctioned equity market, it has not been isolated from adopting the best practices of other well-functioning markets.

Institutional frontier equity investors have taken notice this year, they begin to compare the opportunity to “Myanmar reforming” and “Turkey in 2004.” However, neither country offered a robust equity market trading at significant undervaluation to relative frontier peers. This perception discount combined with the firewall from sanctions has resulted in over a 200% undervaluation of Iranian equities to frontier market peers.

As Iran is rising up to become one of the hottest debates for investors, the natural first movers, the Iranian diaspora of over five million who collectively hold over $300 billion USD, have already begun to invest in the country. On the back of administration change in 2013, new capital inflows drove its equity market up +130%. The next catalyst though might be more differentiated, one that potentially includes the institutional frontier equity investors, a group which through bottom-up analysis would cherry pick the highest quality opportunities from a pool of over 300 companies that total to $170 billion USD in market capitalization. In this scenario, the advancement of corporate governance and public policy will be the silver lining.

Although Iranian equities are not included in any frontier benchmark, long-term investors should include it in their mental portfolio. Opportunity is in motion, however break the big plan into small steps with the first step of on the ground due diligence. The early foreign investors came with doubt which led to questions, by questioning they then arrived to the truth.

*Siamak Kamalie is the Managing Partner / Fund Manager of Cape8 and Swiftarc Capital consumer specialist investors in frontier and emerging equity markets.

*Roozbeh Aliabadi is the Managing Partner of Global Growth Advisors GGA, a strategic consulting firm and leading advisor on business and political strategies.

- This piece has been submitted to PressTV viewpoint.