Ghadir Abu Leil-Cooper, head of EMEA and Frontier Equity Team at Baring Asset Management, discusses the Iranian opportunity.
The rapprochement between Iran and the West took a momentous step forward on 16 January with its long-awaited nuclear deal coming into force.
Implementation of the deal occurred when international inspectors verified the country had dismantled much of its nuclear programme.
The deal provides sanctions relief on roughly $100bn in frozen Iranian assets and opens the way for an easing of the restrictions on trade and investment, which have closed off business activity between Iran and the West for years.
For starters, Iran plans to start bringing 500,000 barrels of oil per day to international markets.
That being said, it will take some time for the Iranian stock market to become directly accessible to overseas investors.
Not all sanctions have been lifted and there remains a complex legal and financial framework that investors will need to navigate to enter the market, including questions around the lack of custody, accounting standards and weak market infrastructure.
Nonetheless, the easing of sanctions marks the beginning of this process.
Our focus is on the longer term opportunities presented by Iran’s reintegration into the global economy.
The country’s stock market has a capitalisation of around $90bn, which would make it the second largest market if it were to be included in the MSCI Frontier Markets Index.
With an estimated GDP of $416bn, its economy is almost as large as Austria’s, and with 80m people it is roughly the same size as Turkey.
Positively, Iran also enjoys many of the attractive characteristics we look for when investing in frontier and Middle East and North African (MENA) market companies.
In particular, the country has a favourable demographic profile with a young, highly educated population that underpins longer term consumption and productivity trends.
In addition, the country’s infrastructure needs are significant, particularly after the years of sanctions, which could present opportunities for investors in a post-sanctions environment.
The easing of sanctions on Iran follows Saudi Arabia’s decision to open the country to direct foreign investment in 2015 and serves as a reminder of the dynamic and changing nature of the opportunities becoming available in frontier and MENA markets.
In anticipation of the eventual opening of the Iranian market, we have monitored and evaluated the investment opportunities available.
This research has revealed a diverse range of companies. Going forward, we expect gradual development of the capital market as a source of funding for private companies and to see privatisations from the state.
The frontier market and MENA asset classes have a comparatively low correlation to developed market equities due to the diversity of companies found in these markets.
And, as companies in these markets are often active in structural growth niches within high-growth economies, they can offer investors unique, long-term growth opportunities that are difficult to access through more mainstream asset classes.