Global Investing

Iran: a frontier for the future

Investors trawling for new frontier markets have of late been rolling into Iran. Charles Robertson at Renaissance Capital (which bills itself as a Frontier bank) visited recently and his verdict?

It’s like Turkey, but with 9% of the world’s oil reserves.

Most interestingly, Robertson found a bustling stock market with a $170 billion market cap — on par with Poland – which is the result of a raft of privatisations in recent years.  A $150 million daily trading volume exceeds that of Nigeria, a well established frontier markets. And a free-float of $30 billion means that if Iranian shares are included in MSCI’s frontier index, they would have a share of 25 percent, he calculates.

What of the economy? Renaissance estimates its size at $437 billion, which if accurate would place it higher than Austria or Thailand. Foreign investors are keen — a thawing of relations with the West has triggered a race among multinations to explore business opportunities in the country of 78 million. Last month, more than 100 executives from France’s biggest firms visited Iran. Robertson writes:

Iran is beyond the final frontier for portfolio investors, but many on the ground appear to believe there is a good chance it will become investable (at least to frontier funds) within the next 6-18 months..Most interesting of all, there is a dynamic reform team now in charge of the government and central bank, which is undertaking the classic monetary and fiscal reforms EM investors usually like. This looks to us like a potential re-ratingplay that could – in an investable scenario – attract those investors who have recently invested in Saudi Arabia, like those who invested in Turkey after 2001 and Russia since the 1990s.

Not so fast.  Despite last year’s initial agreement between Teheran and six world powers, sanctions on Iran remain and until these are removed, few  investors will venture there. Second, fathoming Iran’s idiosyncratic markets could prove a challenge for foreigner, Robertson acknowledges, citing the banking sector and bond markets as an example:

Easy business trend in emerging Europe

Polish central bank governor Marek Belka doesn’t apportion a lot of importance to the fact that Poland can boast the second biggest improvement in the latest World Bank’s ease of doing business index, after Kosovo.

“This year we have improved, but I don’t care too much about it,”  Belka said at a meeting in London today.

Others do see a significant trend emerging from the data around Poland which paints an optimistic picture for those wishing to start and do business in Europe, but not necessarily in the developed markets.

Iran currency plunge an omen for change?

In recent days Iranians all over the country have been rushing to dealers to change their rials into hard currency. The result has been a spectacular plunge in the rial which has lost a third of its value against the dollar in the past week. Traders in Teheran estimate in fact that it has lost two-thirds of its value since June 2011 as U.S and European economic sanctions bite hard into the country’s oil exports. The government blames the rout on speculators.

According to Charles Robertson at Renaissance Capital,  the rial’s tumble to record lows  and inflation running around 25 percent may be an indicator that Iran is moving towards regime change.  Robertson reminds us of his report from back in March where he pointed out that autocratic countries with a falling per capita income are more likely to move towards democracy. (Click here for what we wrote on this topic at the time)

He says today:

The renewed collapse of the currency recently suggests sanctions are working towards that end.

What chances true democracy in oil-rich Iran?

Truly, oil can be a curse. Having it may enrich a country (more likely its rulers) but it does not seem condusive to democracy. And the more oil a country produces, the less likely it is to make the transition to democracy, according to research from investment bank Renaisssance Capital.

So as Iran goes to the polls today, what are the chances it will become a democracy? (Iran itself could argue, reasonably enough, that it is the most democratic country in the region — everyone over the age of 18, including women, are allowed to vote, though the choice of candidates is restricted)

Surprisingly, the Renaissance report’s author Charles Robertson concludes, Iran does have a chance to achieve democracy, though probably not this year. He says no oil exporting country that produces more than 150,000 barrels per day of oil per million of population has ever achieved a transition to democracy (note Norway was already a democracy before it found oil). But others which produce less oil have done so, notably Algeria, Gabon, Congo Indonesia, Nigeria and Ecuador (Some of these democracies are clearly flawed). Robertson writes:

Money in containers. Many see big bucks in Russia’s infrastructure push

A lot of things are wrong with Russia, one of them being its rickety infrastructure.

Many see this as an investment opportunity, however, reckoning the planned $1 trillion infrastructure upgrade plan will get going, especially with the 2014 Winter Olympics and 2018 soccer World Cup looming. Bets on infrastructure have also gathered pace as the Kremlin, seeking to placate a mutinous populace, has pledged reforms, privatisations and a general push to reduce Russia’s dependence on oil exports.

Takouhi Tchertchian at asset managers Renaissance says one sector – shipping containers — reflects the potential for gains from infrastructure improvements. Such containers, usually made of steel, can be loaded and transported over long distances, and transferred easily and cheaply from sea to road to rail.  But Russia has among the lowest levels of containerisation in the world, at around 4 percent compared to the emerging markets average of 15 percent, Tchertchian says. Even in India, almost 3o percent of goods travel by container while in a developed country like Britain, the figure is 40 percent.

Melancholia, social class and GDP forecasts in Turkey

An interesting take on GDP stats and those who make the predictions. An analysis of economic growth forecasts for several emerging markets over 2006-2010 has led Renaissance Capital economist Mert Yildiz to conclude that analysts of Turkish origin (and he is one) tend to be: 

a) far more pessimistic about their country’s economic growth outlook than the foreigners, and 

b) more pessimistic than economists from Poland, Russia, India or China are about their respective countries.