Inflows expected to be initially slow as investors get comfortable with reopened market
Earlier this month, 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 US and other world powers that centered around Iran’s nuclear program.
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 capitalization of about $90 bn, with favorable trading valuations (P/E of 5.6 vs an emerging markets average of roughly 12.2).
Aside from oil (which accounts for roughly 18 percent of Iran’s economy compared with 50 percent of Saudi Arabia’s), services, agriculture, manufacturing and mining are key drivers of domestic growth. Analysts also point to the country’s large IPO pipeline (potentially close to $100 bn, largely due to the government’s privatization program), which has been kept on hold and largely out of the reach of global markets due to the sanctions.
Despite 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’: the possibility that sanctions are reimposed, potentially trapping investors.
Thanks to developments in technology in our sector, companies in Iran have the unique opportunity to leapfrog traditional routes to the capital markets and use new tools or intermediaries to connect with more global pools of capital. Helping companies adopt IR best practices that are at least in line with other emerging markets will require the effort of not just listed companies but also all counterparts. The efforts of the Middle East Investor Relations Society over the last decade should serve as a great case study of what can be achieved when all participants work together to promote the attractiveness of the capital markets.
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. Development of the country’s investor relations practices will be a key piece of the puzzle.
Michael Chojnacki is CEO of London-based IR technology platform Closir. This is an edited version of an article that first appeared on Closir’s blog
