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Iran: Open For Business?

Iran: Open For Business? by Mark Mobius, Franklin Templeton Investments

After years of negotiations, there has been a recent breakthrough between Iran, the United States and other world powers about Iran’s nuclear program. While the deal certainly was controversial, and is still under debate in the United States, strictly from an investment standpoint, we think it represents an exciting development not only for Iran, but for the Middle East/North Africa (MENA) region. Many investors in the region are excited about the potential for this new market to fully emerge. Development of Iran’s capital market and potential opening to investors around the world should contribute to economic development not only in Iran, but also in the region, and could help lower political tensions.

In July, the five permanent members of the United Nations Security Council—the United States, Russia, China, France and the United Kingdom—along with Germany (called P5+1) announced a historic deal with Iran that paves the way for lifting the economic sanctions that were imposed in response to its nuclear planning. The sanctions were intended to keep the country isolated and stifle Iran’s economic potential until the nuclear issue could be resolved. While the sanctions have not formally been lifted yet, we are hopeful that their anticipated removal will bring new investment opportunities that were not available to us before.

Iran has a large, thriving stock market already, with more than 400 listed companies and a market capitalization of more than US$100 billion.1 We have found many good companies in Iran that we believe to be well managed, representing a diverse mix of sectors and industries. Investing in Iran is not only an oil story; agriculture, manufacturing and mining are also key drivers of growth.

We are particularly interested in consumer-oriented stocks as potential investment opportunities, which include retailers, food producers, telecommunication, financials and banking companies. Iran’s banking sector, in particular, could benefit as the need for capital in Iran will be most acute. We believe this area—driven by domestic population growth, demographics and increasing disposable income—should be among the first to benefit from a potential removal of sanctions. We also would anticipate some re-investment of oil wealth back into the domestic and neighboring economies, mainly in terms of much-needed infrastructure investment and diversification projects that aim to move economic dependence away from oil.

We also think the Iranian equity markets today offer some of the most appealing valuation metrics in an emerging markets context. In addition, we think a number of multinational consumer products companies will likely want to expand in Iran, so that could be another area for investors to consider.

Sensing change on the horizon, Iran has been working to prepare for a potential flood of new investors to its market. Iran’s stock exchange has been undergoing improvements in infrastructure, and leaders there are working to comply with international standards in areas such as surveillance and investor protections.

This is encouraging but we think more work still needs to be done to attract international investors. Corruption remains a...