Daneshmand
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Iran is the 'single greatest growth spot in the world'
Stock market employees work at Tehran's Stock Exchange, Iran.
Tehran was up 25% in January. Have you invested yet?
Take a moment to consider just how dark the future is for economic growth worldwide. The slaughter in oil aside, real demand is collapsing at a rate never seen in the last half century, implied volatility across assets classes is exploding, and correlations are racing to one.
In the meantime, Japan has joined other industrialized nations declaring a negative interest rate policy—policy talk for “we have no hope left”—and the other shoe in securitized oil products has yet to drop. All the while, central bankers have been borrowing growth from the future via quantitative easing at a rate that is rational only if they hope to be out of office before anyone notices.
Even the Federal Reserve has begun to sheepishly ask U.S. banks how they would “handle” negative rates (hypothetically, of course). As the new reality slowly begins to dawn on those still holding public equities, the private equity market, home to the truly delusional valuations, is where the real pearl clutching is about to begin in the West. The question is no longer “what is my valuation?” but “how can I avoid losing half my assets?” There is only one place left in the world where doing so is possible: Tehran.
Even if the world wasn’t falling apart and the Tehran Stock Exchange (TSE) hadn’t rocketed 25% in the last month alone, the single greatest growth spot in the world still lies in Iran. Based on my first-hand observations of the daily trading activity over the last two years, I can easily deploy 1 billion USD equivalent without disrupting the public markets or significantly altering the liquidity profile. I also reasonably expect a 150% currency adjusted return in Tehran over the next 24 months. And unlike equity markets in the West, there are generations-worth of untapped private capital waiting to go public and a world hungry for stable yields.
All of this good news begs the obvious question: how to invest? Based on guidance issued by the Office of Foreign Asset Control (OFAC) in mid-January, Americans are limited to offshore vehicles and require a special license – no small hurdle, but not insurmountable. But for the rest of the world, the flood gates are wide open. Why wouldn’t Americans rush to take advantage of the investment opportunities too?
Some would mention that mythological “150 billion” released to Iran— a gross exaggeration orchestrated by the Republican Party and neoconservatives who are choking on a new world order no longer of their own design. The real number is 50 billion, and the “portion” that could fund terrorism, as Secretary Kerry pointed out, is no more surprising than the handful of American welfare recipients converting food stamps into cash to buy OxyContin. Every system has its imperfections, but in Iran the pros far outweigh the cons.
The hedge funds that will outperform in Iran will be the ones run by those who recognize real risk management lies less with variance and correlation but with policy and politics. There is a very different culture around investing in Iran that the West needs to prepare for. The typical openness most corporations have for investors is almost non-existent, and an indication of interest to invest isn’t a confirmation of a good value so much as cause for suspicion.
Nonetheless, I have found that once mutual trust, respect, and good intentions have been established, nothing is impossible. Those who take the time to live in Iran, learn the language, and truly understand the Iranian mindset are welcomed as peers no matter the color of their passport.
My singular focus—the focus of any investor—should lie with the non-traditional risks Iran poses and how things can go wrong rather than the extraordinary opportunity that the Iranian moment represents. A 100% return is fairly meaningless if you suddenly can’t get your cash out of the country because Iran is no longer connected to SWIFT. That risk, thankfully, is near zero. Snapback sanctions, should they occur, will not happen overnight. The international community, led by Europe, will likely signal well in advance of any shift in policy of that scale; the Iranians might take unilateral action to disconnect themselves, but this is equally unlikely because it would roll back generations of work establishing good will and trust at a time relations are just beginning to thaw.
The one major risk factor that keeps me up at night is the lack of tools available to the central bank to effect monetary policy in any significant way. The only other investor I have noticed echo the same concerns is in a recently issued research note by Sturgeon Capital. This is significant because the risk is very real that the tools and experience to tame interest rates during a time of explosive growth are not in place. As I wrote in Business Insider in September, bank savings rates remain in the 15% range. The challenge for the central bank is to push this rate lower to accommodate domestic growth—at the same time the world is buying Rials—is no small task.
The opportunity in Iran in both the public and private equity space remains a singular moment in history and, despite its uniqueness, is one that will not pass quickly. There are decades of growth ahead for this highly educated, energy independent, and entrepreneurial-focused nation that is also a rare beacon of stability in the Middle East. To be sure, there are problems—but there are problems in all states. There will be growing pains in Iran but slow, steady, and prudent stock selection will be rewarded with spectacular returns if, and only if, the known unknowns are managed with the attitude of mutual respect.
Stock market employees work at Tehran's Stock Exchange, Iran.
Tehran was up 25% in January. Have you invested yet?
Take a moment to consider just how dark the future is for economic growth worldwide. The slaughter in oil aside, real demand is collapsing at a rate never seen in the last half century, implied volatility across assets classes is exploding, and correlations are racing to one.
In the meantime, Japan has joined other industrialized nations declaring a negative interest rate policy—policy talk for “we have no hope left”—and the other shoe in securitized oil products has yet to drop. All the while, central bankers have been borrowing growth from the future via quantitative easing at a rate that is rational only if they hope to be out of office before anyone notices.
Even the Federal Reserve has begun to sheepishly ask U.S. banks how they would “handle” negative rates (hypothetically, of course). As the new reality slowly begins to dawn on those still holding public equities, the private equity market, home to the truly delusional valuations, is where the real pearl clutching is about to begin in the West. The question is no longer “what is my valuation?” but “how can I avoid losing half my assets?” There is only one place left in the world where doing so is possible: Tehran.
Even if the world wasn’t falling apart and the Tehran Stock Exchange (TSE) hadn’t rocketed 25% in the last month alone, the single greatest growth spot in the world still lies in Iran. Based on my first-hand observations of the daily trading activity over the last two years, I can easily deploy 1 billion USD equivalent without disrupting the public markets or significantly altering the liquidity profile. I also reasonably expect a 150% currency adjusted return in Tehran over the next 24 months. And unlike equity markets in the West, there are generations-worth of untapped private capital waiting to go public and a world hungry for stable yields.
All of this good news begs the obvious question: how to invest? Based on guidance issued by the Office of Foreign Asset Control (OFAC) in mid-January, Americans are limited to offshore vehicles and require a special license – no small hurdle, but not insurmountable. But for the rest of the world, the flood gates are wide open. Why wouldn’t Americans rush to take advantage of the investment opportunities too?
Some would mention that mythological “150 billion” released to Iran— a gross exaggeration orchestrated by the Republican Party and neoconservatives who are choking on a new world order no longer of their own design. The real number is 50 billion, and the “portion” that could fund terrorism, as Secretary Kerry pointed out, is no more surprising than the handful of American welfare recipients converting food stamps into cash to buy OxyContin. Every system has its imperfections, but in Iran the pros far outweigh the cons.
The hedge funds that will outperform in Iran will be the ones run by those who recognize real risk management lies less with variance and correlation but with policy and politics. There is a very different culture around investing in Iran that the West needs to prepare for. The typical openness most corporations have for investors is almost non-existent, and an indication of interest to invest isn’t a confirmation of a good value so much as cause for suspicion.
Nonetheless, I have found that once mutual trust, respect, and good intentions have been established, nothing is impossible. Those who take the time to live in Iran, learn the language, and truly understand the Iranian mindset are welcomed as peers no matter the color of their passport.
My singular focus—the focus of any investor—should lie with the non-traditional risks Iran poses and how things can go wrong rather than the extraordinary opportunity that the Iranian moment represents. A 100% return is fairly meaningless if you suddenly can’t get your cash out of the country because Iran is no longer connected to SWIFT. That risk, thankfully, is near zero. Snapback sanctions, should they occur, will not happen overnight. The international community, led by Europe, will likely signal well in advance of any shift in policy of that scale; the Iranians might take unilateral action to disconnect themselves, but this is equally unlikely because it would roll back generations of work establishing good will and trust at a time relations are just beginning to thaw.
The one major risk factor that keeps me up at night is the lack of tools available to the central bank to effect monetary policy in any significant way. The only other investor I have noticed echo the same concerns is in a recently issued research note by Sturgeon Capital. This is significant because the risk is very real that the tools and experience to tame interest rates during a time of explosive growth are not in place. As I wrote in Business Insider in September, bank savings rates remain in the 15% range. The challenge for the central bank is to push this rate lower to accommodate domestic growth—at the same time the world is buying Rials—is no small task.
The opportunity in Iran in both the public and private equity space remains a singular moment in history and, despite its uniqueness, is one that will not pass quickly. There are decades of growth ahead for this highly educated, energy independent, and entrepreneurial-focused nation that is also a rare beacon of stability in the Middle East. To be sure, there are problems—but there are problems in all states. There will be growing pains in Iran but slow, steady, and prudent stock selection will be rewarded with spectacular returns if, and only if, the known unknowns are managed with the attitude of mutual respect.
