Iran: the ultimate frontier market

An "oasis of stability". That's how MP Jock Bruce-Gardyne described Iran in late 1966. How wrong he turned out to be.

Fifty years ago, he had just attended a conference in Tehran. He loved it as did his fellow delegates. In a note afterwards, he wrote of their "surprise with the striking contrasts" all over the city, noting the "watermelon stalls on one side of the road" with "new factories for assembling Leyland lorries and Mercedes buses on the other".

He was impressed by Iran's firm sense of nation, its pride in its ancient civilisation, and the "the stability and continuity provided by the personality of the Shah". He noted Iran's steadily improving relationship with the Soviet Union and eastern Europe, and the growing ease with which companies and car companies in particular could do business in Iran.

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Tehran, he reported, was a "Mercedes museum" in that "almost every model ever produced was on the streets". Leyland had "established a strong and flourishing bridgehead"; British double-deckers looked "surprisingly at home under the blue skies of Tehran"; and a new factory was being set up to produce 7,000 Rootes Group saloons a year (Rootes was a UK car manufacturer, making primarily Humber and Hillman cars, that was swallowed up by Chrysler by the end of the 1960s).

Anyone who thought that Iran was "ripe for revolution" was just wrong, said Bruce-Gardyne. He even dared to hope that "the example of Persia's prosperity through stability might even prove infectious" in the region.

Forecasts made about the Middle East tend to be even riskier than those made about regions elsewhere. And Bruce-Gardyne was of course wrong on every single point.

Since the country approved its theocratic-republican constitution in 1979 there has been less "prosperity through stability" than anyone at the 1966 convention might have expected. But could it now return? The end of the sanctions against Iran (at least by the EU and the UN) and the results of recent elections show the reformers have made gains.

Interest in the country has soared: there are conferences aplenty both here and there including one hosted by the Financial Times in London last week and the talk is all of prosperity and stability once more.

I listened to Michael Axworthy of Exeter University speaking at an event held by Scotland-based fund manager MacInroy & Wood last week. His positive case for Iran is hugely compelling. Iran has a young and highly literate population, 60% of which is aged under 35 (no pension problems there) with a wealthy, entrepreneurial and still interested diaspora.

The literacy rate is over 85%, with 68% of university entrants being women, and some 234,000 new engineers graduating every year. The young are also very "IT savvy", says Axworthy. Think of an interesting IT firm in the west and you can be sure it is already replicated in Iran.

A chat with Iran specialist Dominic Bokor-Ingram of Charlemagne Capital cemented the image. He reckons that Iran can grow its GDP at 6%-8% for the foreseeable future. It has all the things it needs to do so. Certainly, sanctions have left plenty of spare capacity Iran currently uses only 42% of its generating capacity. It has the right sort of population. It has very low debt: net government debt to GDP is a mere 4% (this is the kind of figure that George Osborne fantasises about) and its companies and consumers are all but debt free too.

It has a good starting point Iran's economy is already bigger than Australia's. It is also surprisingly diverse. You might think Iranian prosperity is likely to be based on the fact that it has some of the largest oil and gas reserves in the world (fourth-largest oil reserves and the largest gas reserves of all). You'd be wrong, says Bokor-Ingram. Despite all this underground sun, the oil and gas industry made up only 10% of GDP in 2014.

There around 30 other sectors listed on the stock exchange: there may be no Rootes left, but the car industry remains Iran's second-biggest contributor to GDP (look up Iran Khodro I wouldn't mind one of their four-wheel drives). You might also think that much GDP is devoted to military spending. If so, you'd be wrong: it's 2.7%.

Sounds good doesn't it? There are risks. Lots of them. There is the risk that the reformers' progress is shortlived that religious hardliners take back control. And that the result of that is the thing investors in Iran most fear "snapback," or the automatic reimposition of sanctions.

There are many geopolitical tensions: Iran is fighting a good few proxy wars. Axworthy also points to nasty signs of family breakdown, gender discrimination and drug addiction (Iran takes a hard line on drugs but is also home to 2.4 million heroin addicts) and high levels of corruption. Then there is oil. It might be only 10% of GDP but revenues from it make up some 30% of government income. So oil at $20 rather than $60 does matter.

Still, I'm prepared to overlook most of these risks. Why? Price. The Iranian stockmarket has risen 20% since the end of sanctions, but that still puts it on a 2016 price/earnings ratio of 5.5 times with a dividend yield of 13% (Bokor-Ingram's numbers).

The Mobile Telecommunications Company of Iran has 6.5 million subscribers and trades on a price/earnings ratio of 3.5 times. Buy it today and you'll get a 12% dividend. All this discounts the kind of political and economic disasters that look increasingly unlikely (note that Russia, which I am also prepared to hold on the basis of cheapness, is on over seven times) and makes very little allowance for the improvements that look increasingly likely.

At this price, Iran has to be one of the best opportunities in the investment world right now even if the "E" in the PE equation isn't 100% accurate. The bad news is that I'm not the only one to have noticed. Charlemagne Capital held a conference that included Iran this week: it was packed and I was getting texts from excitable rich friends in the audience by coffee time.

And it isn't easy for ordinary investors to get in: there are technical problems (with foreign exchange and with custodians) and the US sanctions make it hard for US banks to do much. And of course the whole idea is rather new foreign buying is a mere 1% of the market.

Charlemagne has the only fund I know (with its Iranian partners) the Turquoise Variable Capital Investment Fund. Unfortunately, to get in you need to invest $125,000, pay high fees, and not mind there being no liquidity if everyone piles in and then tries to get out again (almost inevitable with newish markets like this). But if you can cope with all of that, Iran is definitely worth a look.

This article was first published in the Financial Times