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Sun 17 Jan 2016 03:13 PM

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Iran's $90bn stock market just became more accessible: All you need to know before you invest

Once one of the world’s hardest-to-enter stock markets, inflows into the Tehran Stock Exchange may reach as much as $1bn after six to eight months, some estimate

Iran's $90bn stock market just became more accessible: All you need to know before you invest

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 will allow 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 is already legal for many international investors, financial sanctions placed on the banking system have made it almost impossible to transfer money in and out of the country. The majority of those sanctions are being 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 will see sanctions lifted, many US-related bans will remain. US citizens and companies will mostly be prohibited from trading with Iran, and most dollar-denominated transactions will not be able to settle through the US system, likely preventing large dollar deals.

Even so, dozens of Europeans and Americans living in Europe have been on organized investor tours to Iran over the past year, assessing the landscape and visiting some of the large, listed manufacturers. Many have already 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 will 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 US-based.

“Many of the major European-based financial institutions have recently been involved in enforcement proceedings because of problems they’ve had with” US sanctions, said Danforth Newcomb, a sanctions lawyer at Shearman & Sterling in New York. In settling the disputes, they “put in place what are US-style sanctions-compliance programs, and that will make many of those institutions gun-shy about having financial transactions with Iran," he said.

Then there’s the “snapback" risk. The nuclear deal that has unlocked Iran’s economy contains provisions that would reimpose sanctions under certain circumstances at any time within a 10- year period after the deal starts, laying a potential trap for investors with money in the country.

And that’s before you even start talking about the standard of financial reporting and regulation in a market that’s been shut out of the international community.

What are the key statistics?

The more than 300-member benchmark TEDPIX Index traded at 5.7 times profit at the end of December, according to latest data on the exchange, compared with 12.2 times for stocks in developing countries, according to MSCI indexes.

The benchmark fell about 11 percent last year after sinking 21 percent in 2014, the first annual decline since 2008. The average monthly turnover for 2015 was $902 million.

Trading is from 9 a.m. to 12:30 p.m. in Tehran, Saturday to Wednesday. Prices are available on the Tehran Stock Exchange website.

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