Right now, the U.S. is doing the rest of the world a big favour…
It’s locking itself out of one of the largest and more attractive pre-frontier markets.
I’m talking about Iran.
In a rare interview with Harvard Business School that was published online earlier this month, (it has since been taken down) value investor Seth Klarman spoke at length about his investment process, philosophy and the changes value investors have had to overcome during the past decade. Klarman’s hedge fund, the Boston-based Baupost has one of Read More
Most of the world is clamouring to do business with the country. But for the U.S., Iran is near the top of President Donald Trump’s “naughty” list…
Tensions between the U.S. and Iran are heating up (again)
Iran has been enemies with much of the rest of the world – the west, at least – for most of the past few decades. Former U.S. president George W. Bush labelled it as part of his “axis of evil” (along with Iraq and North Korea). And economic sanctions have prevented western investment in and trade with Iran – a pivotal power in the Middle East that’s the world’s 29th largest economy (just ahead of the United Arab Emirates and Norway) – for more than 35 years.
That started to change in July 2015, when a long-negotiated deal on Iran’s nuclear development programme paved the way for some normalisation of relations between the U.S. and Iran. It looked like Iran was slowly edging its way into the global economy.
I visited Iran a few years ago, when I was writing an investment newsletter focused on investing in out-of-favour markets around the world. At the hotel where I stayed (there were no international hotel chains due to sanctions) there were plenty of Chinese and Russian businessmen. There was cautious talk of American companies getting involved in Iran’s energy sector – the country has the world’s fourth-largest proven oil reserves and the second-largest proven gas reserves.
But then, Donald Trump took office. Within his first week, he signed an executive order barring citizens of seven Muslim-majority countries, including Iran, from entering the U.S. Iran promptly reciprocated by banning American citizens from visiting the country.
Then this summer, Trump announced several new sanctions on Iranian individuals and groups. Iran is now threatening to back out of the nuclear development programme agreement.
But that hasn’t stopped the rest of the world from beating a path to Iran.
The Iranian business boom
It’s not every day that a relatively wealthy nation – on a GDP per capita basis Iranians are about as wealthy as Mexicans – whose 75 million citizens have been deprived of investment and western consumer toys is suddenly open for business.
That’s why businesses around the globe are jumping at the chance to do business with Iran…
For example, China is financing a new US$2 billion high-speed railway in Iran. This is part of China’s massive One Belt One Road (OBOR) infrastructure project, which will help China cement strategic interests across the globe. You can bet that China is greedily eyeing Iran’s enormous infrastructure needs (the country’s physical and transportation infrastructure is run down and in need of a serious overhaul).
Meanwhile, as a very small first step India is spending US$150 million to develop a port in Iran. India believes the port will open up export markets in Afghanistan, the South Caucasus and Central Asia.
And it’s not just emerging markets working with Iran…
France and Germany have recently signed deals with the country. French automaker Groupe Renault has signed a US$775 million joint-venture deal with Iran’s Industrial Development and Renovation Organisation and company Parto Negin Naseh Group.
(When I visited Iran, rickety old Renaults were a dominating presence on the asphalt – so it’s hardly surprising that Renault was at the front of the line to get back into Iran.)
German automaker Volkswagen has also started importing cars to Iran again – for the first time in 17 years.
And Iran’s massive energy sector is the target of French energy giant Total, which is investing US$1 billion in a huge offshore gas field in Iran.
Energy, cars and infrastructure are often among the first investments in new markets. So make no mistake, these deals are just the beginning.
Why business is flocking to Iran
Iran’s isolation from the west and its desire to do business with foreigners presents an enormous opportunity. As I mentioned, physical and transportation infrastructure is run down and in need of a serious overhaul. Rebuilding Iran could take many years and hundreds of billions of dollars in investment.
And on another front, there are no McDonald’s or Pizza Huts in Iran. You won’t find CNN on the hotel television. Tom Cruise and Scarlett Johansson aren’t playing at the local cinema, and Tehran isn’t on Justin Bieber’s concert map. Instead of western consumerism, Iranians have easy access to items made in China (or Russia). But many regular Iranians are enormously curious about the consumer products – and lifestyle – that much of the rest of the world takes for granted.
So there’s a big opportunity for people to get rich from selling stuff and services to Iranians. They want to buy the products, eat the fast food and watch the mindless entertainment that the rest of the world takes for granted. They also want to drive new cars (most cars on the road are ancient) on good roads, and work in offices that are a few notches above what would pass for Class C space in the rest of the world.
Investing in Iran
As I mentioned, I went to Iran a few years ago in search of investment opportunities. Given economic sanctions on Iran – and, most importantly, the sanctions-imposed isolation of the country’s banking sector from most banks in the rest of the world – it would have been very difficult to invest directly in the country. For the citizens of many countries, it’s actually illegal.
In an effort to find a roundabout way of investing in Iran’s potential explosive growth, I analysed a Turkish retail chain… a French car company… a German infrastructure services provider… a Russian metals company… and a number of other companies that either had small-scale operations in Iran, or which were positioned to move into the country. But none of them offered sufficient access to the potential of Iran’s market. A US$3 billion company that might earn US$50 million in three years in Iran isn’t an “Iran play”. It’s a company that is dipping its toes in Iran.
Finally, after a conversation with a Central Asian oil industry veteran, I found a path to investing in the opening of Iran via a London-listed oil company that was doing business in neighbouring Turkmenistan. An easing of sanctions in Iran would allow this company to transport oil to the Persian Gulf at a substantially lower price, thereby dramatically boosting margins.
But my investment thesis didn’t have time to unfold. Within months of recommending the company in my newsletter, it wound up being bought out by the majority shareholder at a 39 percent premium to the price I initially recommended.
Finding other Irans
Of course, it’s not every day that a country appears on the global investment scene, ready-made and starving for investment.
But there are literally hundreds of similar opportunities: Underdeveloped sectors and markets that are poised to boom… but are far off the radar of pretty much every investor. These are the types of opportunities where you can make life-changing gains.
Finding opportunities like this is part of a new investment research service I’ll be launching very soon. So stay tuned…