Podcast Summary
Identifying investing opportunities with a 360-degree perspective: Staying informed and adaptable is crucial for identifying investing opportunities in both familiar and unfamiliar markets, despite challenges like limited information and geopolitical risks.
Access to information and global connectivity play crucial roles in real estate investment and stock market analysis. Principal Asset Management leverages a 360-degree perspective, combining local insights and global expertise to identify compelling investing opportunities. However, some markets, like the Tehran Stock Exchange in Iran, remain unfamiliar and opaque due to sanctions and geopolitical risks. These markets can be challenging to access for investors, as limited information is available, making it difficult to assess market conditions and potential investments. Despite its size and potential, the Iranian market often goes unnoticed due to its isolation from the western financial system. It serves as a reminder of the importance of staying informed and adaptable in the ever-changing global economy.
Underserved Iranian Market with Huge Potential: Investor sees Iran's large population, abundant natural resources, and potential for economic growth as reasons for significant market growth and high returns for early investors
Mache Voetal, an investor in Iranian stocks, sees significant potential in the Iranian market, which is currently underserved due to sanctions and lack of foreign investment. With a population of around 90 million people, the largest combined oil and gas reserves in the world, and a properly developed and diversified economy, Iran's economy could potentially reach up to 1.8 to 2 trillion dollars in a super optimistic scenario. Currently, the market is valued at around $200 billion, and assets are valued at very low levels due to a lack of capital. Once the country opens up and foreign investment is allowed, there is expected to be a significant influx of capital, leading to increased asset values and potentially high returns for early investors. The Iranian market offers a unique opportunity for investors due to its large population, abundant natural resources, and potential for economic growth.
Geopolitical risks in the Middle East impact equity markets: Geopolitical risks in the Middle East can significantly impact equity markets, requiring local resources and personal connections to access data from restricted financial systems. A leading real estate manager with global perspective and local expertise can help investors navigate complexities and capitalize on opportunities.
Despite strong double-digit dividend yields and relatively low investment risks for the top 100 companies, geopolitical risks, particularly in the Middle East, can significantly impact equity markets. Accessing data from countries with restricted financial systems, like Iran, requires local resources and personal connections. The situation in the Middle East serves as a reminder of how quickly perceptions and narratives can change, with significant implications for investors. For instance, the recent thawing of relations between Iran and its regional allies brought about a more optimistic outlook, despite the country's financial system being largely cut off from international access. To navigate these complexities, a leading real estate manager with a global perspective and local expertise can provide valuable insights and help investors capitalize on opportunities in today's market.
Iranian Stock Market Volatility in October 2022: The Iranian stock market experienced significant volatility in October 2022 due to geopolitical tensions and low liquidity, with local exporters performing well but foreign investors still down due to currency depreciation. Retail investors drive market direction, and the market is well hedged against currency depreciations but lags in reacting.
The Iranian stock market experienced significant volatility in October 2022 due to geopolitical tensions and low liquidity. The local equity index saw a correction of up to 10% in dollar terms, but has since bounced back in local currency terms. However, foreign investors are still roughly 3% down due to the currency depreciation. The biggest impact was on illiquid stocks and industries, such as textile producers and confectionaries. It's important to note that retail investors drive the stock market direction in Iran, and the currency is the most volatile factor. Despite the challenges, the local stock market is actually well hedged against currency depreciations due to the majority of companies being exporters. However, share prices react with a lag to currency movements. Due to the unique nature of the Iranian market, it can be difficult to benchmark its performance against other emerging markets.
Historical Performance of Iran's Stock Market: Iran's stock market offers attractive returns, naturally hedged against currency risks, and presents opportunities for foreign investors to position before market rallies, but comes with unique challenges such as political instability and sanctions.
Despite the high volatility and currency risks associated with investing in Iran's stock market, the historical performance shows that it can offer attractive returns, with an annualized return of around 11% over the last 15 years, which is comparable to the S&P 500. This is due to the fact that many Iranian companies are naturally hedged against currency volatility and depreciation, as their earnings are often denominated in local currency. Additionally, foreign investors have the opportunity to position themselves before the market rallies after a currency move, due to the lag in pricing in Iran compared to more developed markets like the US. These factors make investing in Iran an intriguing opportunity for those willing to take on the added risk. However, it is important to note that investing in Iran comes with its own unique challenges, including political instability and sanctions, which should be carefully considered before making an investment decision.
Iran's currency stability signals enough oil revenue: Iran's stable currency indicates around $30-$40B yearly oil sales, easing import pressure & budget deficits
The stability of Iran's currency, which has been super stable around 500,000 rials per dollar in recent months, is a clear sign that there is enough oil revenue flowing into the country, easing the pressure on Iran's need to buy dollars for essential imports. This stability, which contrasts with the previous volatile years, indicates that Iran is managing to secure around $30 to $40 billion per year from oil sales, which is crucial for financing imports and managing budget deficits. This development, if sustained, could bring some much-needed stability to Iran's economy. However, it's important to note that the lack of easy bank transfers and the accumulation of funds in foreign accounts can limit the direct impact on the Iranian economy.
Iranian Retail Market: Real Estate and Used Cars as Popular Hedges: Iranian retail investors predominantly invest in real estate and used cars as hedges against inflation and currency depreciation due to capital controls and the Iranian Rial's volatility against the US Dollar.
The Iranian retail market, dominated by domestic investors, shows significant volatility in response to currency movements and local interest rates. Real estate and used cars are the primary asset classes for retail investors due to their role as hedges against inflation and currency depreciation. The high demand for cars and the limited supply lead to active trading in used cars. The Iranian Rial's volatility against the US Dollar makes it essential for individuals to monitor exchange rates closely, and due to capital controls, they often invest in these asset classes instead of directly buying and selling currencies. Additionally, high-yielding treasury bills offer another investment option for Iranians, making interest rates an essential factor in retail sentiment and inflows.
Iran's Economy: Survival Mode and Unused Savings: Iran's economy is characterized by survival mode due to lack of capital and credit, causing delayed investment decisions. Domestic savings are unable to leave due to capital controls, leading to a significant issue for the economy. Households, once high savers, have been negatively impacted by sanctions and inflation, but their savings helped them survive.
Iran's economy is characterized by a lack of capital and credit, which leads to a survival mode for businesses and individuals. This volatility in the macroeconomic environment causes people and companies to postpone investment decisions and prioritize managing crises over optimization. Despite this, there are significant domestic savings within the Iranian economy that are unable to leave the country due to capital controls. This issue was previously compared to China's "great ball of money." Iran's household savings were once among the highest in emerging markets, but the last few years have been challenging due to sanctions. These sanctions led to increased costs for manufacturers and currency depreciation, but their margins actually expanded due to selling in hard currency or at regional benchmarks. The highest earnings growth was seen after the 2018 sanctions, with households being the primary victims due to decreased spending power. However, their high savings helped them survive the inflation. The situation may have changed as those savings have been decreasing due to necessary spending.
Iran's Economic Future: Shifting from West to East: Iran may move away from Western financial integration towards a more Chinese-centric economic sphere, while demographic changes drive the need for liberalization and adaptation to young people's needs.
The future of Iran's economic direction may not involve integration into the Western financial system as previously expected, but rather a shift towards a more Chinese-centric sphere of influence. This regionalization trend is reflected in Iran's acceptance into organizations like BRICS and the Shanghai Corporation Organization. However, demographic changes, particularly the large population of young people born after the revolution, will also significantly impact Iran's future. These young people have different aspirations and lifestyles than previous generations, and governments in the region must adapt to keep power by addressing their needs. This includes liberalizing certain areas of life and allowing for speculative investments in sectors like real estate and used cars. Overall, Iran's economic future may look less like the Western financial system and more like a unique blend of regional economic systems.
Holding larger inventories and cash reserves in economically uncertain environments: In economically uncertain environments, companies may prioritize holding larger inventories and cash reserves over efficiency, contrasting with American investor preferences.
In economically uncertain environments, such as in Iran, companies tend to hold larger inventories and cash reserves as a cushion against potential disruptions and sanctions. This contrasts with the efficiency-focused approach preferred by American investors. Furthermore, the geopolitical landscape is shifting towards a few large spheres of influence rather than a single, globalized economy. The potential for increased relationships between Iran and countries like China and the BRICS is an interesting development, but the future of Iran's integration into the global economy is uncertain. The podcast also touched upon the possibility that in the current global climate, the assumption that countries like Iran would inevitably be absorbed into the global economy may no longer hold true.
