Capital Market

Payam Afzali

Debates on stag-exit package and opportunities shaping around developments in foreign policy are hotter than ever these days. In a report on his recent trip to Iran in order to assess investment opportunities in the capital market, Charles Robertson at Investment Bank Renaissance Capital says that "Tehran feels like Ankara did in 2004 but unlike Turkey, it has 9% of the world's oil." He notes that promising developments in nuclear talks and economic reform will make Iran investable, at least to frontier funds, within the next six to 18 months.
At first glance, it may appear that easing sanction would be the ultimate release for the country, however, any success in attracting and maintaining foreign investments demands collective action from capital market policy makers, enterprises and investment and financial service providers.
Positive developments from efforts undertaken to amend oil contracts to removal of barriers to obtain entry visa to Iran, all indicate a firm determination on the part of policy makers to welcome foreign investment to the country. On the other hand, there is a growing attention towards stock market as an attractive solution to absorb foreign investment. With a market capitalization of $3.4 billion, half of companies listed in London Stock Exchange are international legal or natural persons. In Malaysia, one quarter of the list with market cap of $0.8 billion is occupied by international companies. Now the question is why for Iran the figure has dropped below 0.5%? Why are there more than 35,000 trading codes registered in South Korea under the name of foreign legal or natural persons while the number in Iran is only 295? Undoubtedly, capital market is the major driver of economy. Attracting foreigners inside this market requires an enabling environment. Admittedly, criteria such as market indicator only serve as a thermometer and cannot cure the fever.
Investors eager to roll in
In global market classification of developed, emerging and frontier markets based on risks and benefits, Iran falls under the third group. These markets are typically pursued by investors seeking high, long-run return potential, a kind that fund managers would always allocate some off-index investment to.
Iran is a cheap market compared with other international markets which adds spice to its attraction. This characteristic, however, is not detectable at first glance. If the ratio of stock share to some fundamental parameters of a company serve as an indicator to measure market price, global markets appear much more expensive than Iran. In general, share prices in the US stock markets are 16 to 18 times higher than the return on each share. The average outside the US is 13 while in Iran it ranges from 7.5 to 8.5 which is far below the global average. In other words, the price of the share of a certain company in Iran with a certain net return is averagely less than the half compared to the price of the share of a company with the same net return in the US. At worst times during the sanctions, Iran's stock market return in 2013 was 130%, a large part of which was due to inflation. Even if inflation is curbed in this case, still it is twice the return on S&P 500 in the US for the same period.
Investment challenges and opportunities
The investment process for foreign legal and natural persons in Tehran Stock Exchange (TSE) is clearly defined. While foreign investors in Saudi Arabia eye 2015 to obtain permission to make direct entry to Arab stock exchange, Iran has already allowed for their participation and facilitated the process under a number of regulations namely the Foreign Investment Promotion and Protection Act (2002) and Regulations governing Foreign Investment in Stock Exchange & OTC Markets approved by the Cabinet of Ministers and the relevant executive guidelines as approved by Stock Exchange Council. In light of insignificant number of foreign investors in TSE and the tiny volume of foreign capital therein, it can be concluded that operational infrastructure to accept foreign capital in the Iranian market has not been tested yet. Therefore, Securities and Exchange Organization (SEO) together with Investment Organization need to promote the culture of effective interaction with investors in areas such as fund registering and transfer, receiving applications and issuing trading code through stock brokerages.
Another challenge is the non-standard means of investment in stock market. Foreign investors are endowed with ample knowledge on trading shares and stocks. Unlike SEO that has invested its entire attention and energy on market capital and fluctuations, foreign investors may be able to easily analyze the Iranian market as a large share of capital market is owned by companies identified by key value factors in fundamental industries. Iranian bond market is not understandable by the foreigners. In his report, Charles Robertson at Renaissance Capital noted that " … Iran's fixed income markets [bond market] are unlike anything we've ever seen. Any corporate or government bond has a fixed coupon (around 20%) a fixed price, and as far as we understand, they can be redeemed for cash at any time." In addition, restrictions on the market for example fluctuation and quotation limit, bond market trade volume limits are among the topics difficult to digest by a professional foreign investor. Other sources of concern for foreign investors leading to migration of funds from Iran's market are placing restrictions on stock sales, frequently changing status of stock codes, lack of transparency and unstable policies. In brief, building confidence through standardizing the rules of the game, with which the investors are familiar and avoiding odd policies are the keys to attracting and maintaining foreign investment. It is worth noting that in the recent months, trading Islamic bonds has been allowed. Moreover, efforts are underway to give space to credit rating institutions, define single exchange rate and correspond interest rates to inflation. The developments will bring the Iranian financial markets in line with the international standards, familiar for investors.
Foreign investment attraction cycle is further completed by firms providing professional Investment-related services. In this respect, brokerages, investment firms and asset managers should be equipped with ample knowledge on customer relation management international standards and methodologies and able to provide professional analysis of the domestic market climate together with performance reporting skills.
Despite the sanctions, the administration's changing attitudes in the past 12 months has encouraged negotiations and intensified efforts to pave the ground for foreign investors to roll in, in particular professional ones. Now that both sides signal willingness, the ball is in the court of all stakeholders including policy makers to lay the required ground for meeting the interests of local and foreign investors.