One of the world’s hardest-to-enter stock markets just became more accessible to international investors.
As financial sanctions are eased against Iran, foreigners can enter a bourse in Tehran with nearly as many listed companies as Istanbul. Inflows may reach as much as US$1 billion after six to eight months, estimated Reza Soltanzadeh, a founding partner at ACL Assets Management, a good investment firm that concentrates on Iran.
What’s the big deal?
With a market cap of approximately US$90 billion, Iran’s stock market is fifth-largest in the centre East. The lifting of sanctions permits the country to compete for investor attention with Saudi Arabia, which opened the region’s biggest stock exchange to direct foreign ownership seven months ago.
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While buying Tehran’s bourse had been legal for a lot of international investors, financial sanctions placed on the banking system made it nearly impossible to transfer profit and overseas. Nearly all those sanctions happen to be removed after an international deal over Iran’s nuclear ambitions, allowing the nation’s banks to reconnect to the Swift system for international financial transactions.
Although buying shares hasn’t been prohibited for Europeans, purchasing certain industries, such as energy, continues to be not allowed.
Who can and will invest?
For all of the talk of how the nuclear deal has witnessed sanctions lifted, many U.S.-related bans remain. U.S. citizens and firms are mainly prohibited from trading with Iran, and most dollar-denominated transactions are unable to settle through the U.S. system, likely preventing large dollar deals.
Even so, dozens of Europeans and Americans living in Europe have been on organized investor tours to Iran over the past year, assessing the landscape and visiting a few of the large, listed manufacturers. Many obtained the required trading codes and licenses to organize for the elimination of sanctions.
“Initially we’ll have the braver sort of family offices, fund managers who will come in within the first six to eight months,” said Soltanzadeh. These will be “setups which have carried this out in a lot more dangerous places in the world plus they understand risk,” he said.
How can international investors enter?
There are a couple of ways to access Iranian equities: invest directly, or undergo local funds, said Parham Gohari, co- founding father of Frontier Partners, a professional-services firm advising multinationals on entering Iran.
Investing directly requires the utilization of a broker based in Tehran, in addition to a foreign trading license and investment code in the Securities and Exchange Organization. The code is needed to buy and sell securities in Iran.
The second way is to use a local fund. Several companies have been preparing foreign investment funds for Iran in anticipation of the lifting on sanctions. An index-linked ETF for foreigners already exists and a small fund subjected to sanctions-proof companies started in December.
“There are two or three bodies involved if you wish to cope with the direct route,” Gohari said from Dubai. When using a nearby fund, “you would have to research your options and understand the performance of a few of these companies over the last few years,” he explained.
Can foreigners buy shares of any company?
No. Sanctions stay in place on about 200 businesses and people, some of them linked to listed companies. Additionally they affect firms owned by certain institutions, such as the Iranian Revolutionary Guards.
Sturgeon Capital, a London-based hedge fund, said hello identified about 50 companies, or some 10 % of those traded on the Tehran Stock Exchange, which were sanctions- compliant and never subjected to any entities previously sanctioned or that remain sanctioned after implementation from the nuclear deal.
Meanwhile, the U.S. Treasury Department on Sunday announced sanctions against 11 companies and people for his or her ties to Iran’s ballistic missile program.
Are we going to see a big rush?
Not Likely. The rest of the sanctions really are a nightmare for compliance departments of huge institutions, even if they’re not U.S.-based.
“Many of the major European-based financial institutions have recently tried enforcement proceedings because of problems they’ve had with” U.S. sanctions, said Danforth Newcomb, a sanctions lawyer at Shearman & Sterling in Ny. In settling the disputes, they “put in place what exactly are U.S.-style sanctions-compliance programs, and that will make many of those institutions gun-shy about having financial transactions with Iran,” he explained.
Then there’s the “snapback” risk. The nuclear deal that has unlocked Iran’s economy contains provisions that would reimpose sanctions under certain circumstances at any time within a 10- year period following the deal starts, laying a possible trap for investors with money in the country.
And that’s before you even start talking about the standard of monetary reporting and regulation inside a market that’s been shut out of the international community.
What are the key statistics?
The more than 300-member benchmark TEDPIX Index traded at 5.7 times profit at the end of December, according to latest data around the exchange, in contrast to 12.Twice for stocks in developing countries, according to MSCI indexes.
The benchmark fell about 11 per cent this past year after sinking 21 percent in 2014, the very first annual decline since 2008. The typical monthly turnover for 2015 was US$902 million.
Trading is from 9 a.m. to 12:30 p.m. in Tehran, Saturday to Wednesday. Prices are on the Tehran Stock Exchange website.