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 almost as many listed companies as Istanbul. Inflows may reach as much as $1 billion after six to eight months, estimated Reza Soltanzadeh, a founding partner at ACL Assets Management, an investment firm that focuses on Iran.
What’s the big deal?
With a market cap of about $90 billion, Iran’s stock market is fifth-largest in the Middle East. The lifting of sanctions allows the country to compete for investor attention with Saudi Arabia, which opened the region’s biggest stock market to direct foreign ownership seven months ago.
While investing on Tehran’s bourse was already legal for many international investors, financial sanctions placed on the banking system made it almost impossible to transfer money in and out of the country. The majority of those sanctions have been 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, investing in certain industries, such as energy, has been off limits.
Who can and will invest?
For all the talk of how the nuclear deal has seen sanctions lifted, many U.S.-related bans remain. U.S. citizens and companies are mostly 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 organizedinvestor tours to Iran over the past year, assessing the landscape and visiting some of the large, listed manufacturers. Many obtained the necessary trading codes and licenses to prepare for the removal of sanctions.
“Initially we’ll have the braver sort of family offices, fund managers who will come in in the first six to eight months," said Soltanzadeh. These will be “setups that have done this in a lot more dangerous places in the world and they understand risk," he said.
How can international investors enter?
There are two ways to access Iranian equities: invest directly, or go through local funds, said Parham Gohari, co-founder of Frontier Partners, a professional-services firm advising multinationals on entering Iran.
Investing directly requires the use of a broker based in Tehran, as well as a foreign trading license and investment code from 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 exposed to sanctions-proof companies started in December.
“There are two or three bodies involved if you want to get through the direct route," Gohari said from Dubai. When using a local fund, “you would have to do your homework and understand the performance of some of these companies over the last few years," he said.
Can foreigners buy shares of any company?
No. Sanctions remain in place on about 200 businesses and individuals, some of them connected to listed companies. They also apply to firms owned by certain institutions, such as the Iranian Revolutionary Guards.
Sturgeon Capital, a London-based hedge fund, said it identified about 50 companies, or some 10 percent of those traded on the Tehran Stock Exchange, that were sanctions-compliant and not exposed to any entities previously sanctioned or that remain sanctioned after implementation of the nuclear deal.
Are we going to see a big rush?
Not Likely. The remaining sanctions are a nightmare for compliance departments of large institutions, even if they’re not U.S.-based.