Odd Lots - What It's Like To Be An Investor In Iran's Market Right Now

Episode Date: January 13, 2020

Iran's stock market is one of the most unfamiliar equity markets in the world. With Iran under stringent U.S. sanctions, it's hard to even find data on where Iranian stocks are trading. Then there's geopolitical risk. This month the U.S. killed Iran's top general Qassem Soleimani and Iran retaliated by firing missiles at U.S.-Iraqi air bases, sparking a sell-off in global markets. So what happened to Iranian stocks in this time period? On this week's episode of Odd Lots, we speak with Maciej Wojtal, who runs the only European asset manager focused on Iranian stocks.See omnystudio.com/listener for privacy information.

Thanks for listening to Odd Lots. Follow the show on Amazon Music for more future episodes or just ask, Alexa, play the Odd Lots podcast on Amazon Music. Hello and welcome to another episode of the Oddlots podcast. I'm Tracy Alloway. And I'm Joe Wisenthall. So, Joe, we had a pretty eventful week in markets recently. Yeah, a pretty extraordinary start to the week. Or really, I should say the start to 2020, the start to 2020. the first trading day of the year was really strong. And then almost immediately thereafter we got the news about the Iranian general being killed. And suddenly that has been the focus of markets in 2020, the repercussions of such. So the Trump administration killed Iran's top general, Kassam Soleimani. And then that knocked markets immediately. But then a few days later, you had Iran retaliating against that killing by five. a series of missiles at U.S. Iraqi airbases in Iraq, and that caused yet another sell-off.

I think at one point U.S. equity futures were down something like 1.7 percent, and we saw gold spike up to $1,600 per ounce. But did anyone ever stop to ask what was going on with Iranian stocks at that same time? I certainly did not stop to ask that question, and I did not think about it for. various reasons, which we'll get into. One point that we should just make before moving on is that part of what's been interesting about U.S. markets has been the degree of resilience. So even with all these headlines that totally caught people by surprise and we have markets near record highs, the volatility and the headlines haven't driven domestic U.S. markets sustainably lower. In fact,

as of this moment. They're basically at all-time highs, yet again, quite surprising to some. But you are totally right that there has been much less focus on regional stock markets, including the Tehran Stock Exchange, which exists, but which gets virtually zero discussion. Well, I'm being somewhat facetious, because I think everyone knows why we don't talk about Iranian stocks that much. And that's because of U.S. sanctions, of course, and the fact that that particular market and economy and country, really, is cut off from large parts of the world. But there is a Tehran stock exchange. There is a stock market. And I think it would be really, really interesting to find out exactly what happened in that market over the past week or so. And also just find out generally how it works.

Not only do you have geopolitical risk, but you also have these really stringent sanctions. Yeah, no, I've, you know, I'm aware of the market exists, but I don't know anything about it. I don't know who can invest in it. I don't know how liquid it is. I don't know how much retail participation or what are the big companies. I literally know nothing about the Tehran Stock Exchange. All right. Well, let's find out.

We have the perfect guest to walk us through it. It's Matchet-Wehaital, who runs the only. European asset manager focused on Iranian stocks, a company called Amtelon Capital. Mace, thank you so much for coming on. Hi, thank you for having me. So I guess the obvious question to start out with is, how did you end up in this space? Because I don't think your name sounds very Iranian. Oh, no, Mace is a typical Polish name.

So I'm from Poland, race in Warsaw, moved to London when I got my first job in JPMorgan and I've been there ever since. And I had zero connection to Iran. So what caught my attention is obviously the Iran deal that was signed in 2015 and implemented in 2016. I also was just aware that there was a stock market in Iran because we used to run. global equity long short portfolios across developed and emerging markets, so including places like Kenya, Vietnam, China, Asia, a lot of different niche markets. And Iran was always there as something potentially interesting, but we couldn't touch it so, so no one did anything. And then when in 2016, the country opened up for, well, pretty much everyone except for

US investors, I got interested, I did some research, I realized that there was a proper stock market. And this is what got me really excited because, you know, there is this huge potential growth story for Iran as a country of, you know, 83 million people, educated, young population with wages right now lower than in Vietnam, with, you know, diversified economy, with the largest oil and gas reserves in the world. But this is only 15% of GDP. You know, it's a good thing about being under sanctions for so long that they had to develop all the different sectors of the economy. But then for me, as a portfolio investor, what was exciting is that there is a stock market with 600 stocks listed, $130 billion market cap, and daily liquidity of roughly

$150 million per day on average. So it's a proper market. And the best thing is, was that you had the lowest valuations in the world. We were talking about, you know, four times earnings, and those earnings are growing. And there are no foreign investors. So all foreign money that got invested there was less than. So, you know, when I, when I saw all this, I just told my wife basically that I bought a ticket to Tehran. I didn't know anyone there. So I just arranged a couple of meetings with the local brokers when there, you know, opened

accounts from myself, tested everything with my own money. It worked. So I decided to set up a fund that would be focused on this particular opportunity. So let's talk about the restrictions on who can invest. You're based in London. Anyone in Europe is allowed under current sanctions regimes to invest, but I take it in the U.S. It's completely off limits. So you have two most important types of sanctions, primary sanctions that say that U.S.

persons cannot touch Iran. We cannot accept investments from U.S. investors. We, as a fund, cannot use US dollar or U.S. banks. And then you have secondary sanctions, which say that no one else should do business entities, both individual and corporate entities that are on the SDN, on the sanctions list. And also, there is a, or activities that you shouldn't be doing, like, you know, physical trading in oil A big part of our job is due diligence, actually, and we have a special, what we can do, what we cannot do. There is a lot of work. Investing in Iran is actually, before you actually get to invest, you have to do a lot of legal work. And then investing itself is actually easy. So who does your typical client end up being? Like, can you give us a sense of who they are?

But also, what are they looking for out of the market? Is it, you know, is it a steady stream of dividends? because capital appreciation seems kind of difficult when you're cut off from a big chunk of the amount of capital in the global economy? That will be surprising to hear, but this is actually the best performing equity market of 2009, 19, sorry, in dollar terms. So last year, the main index of Tehran stock exchange doubled or precisely went up by 99.5% in dollar terms. And when you check Bloomberg, for example, you sort all the indices by the performance, you don't see it because it's not in your database. So it's actually the best performing equity market that no one knows about. So you are looking for capital gains absolutely there.

So who are the clients then that are interested in the space? So I get the return, but you still have to have this conversation about investing in what a lot of people would consider a relatively risky market. Oh, yes, absolutely. So first of all, all the investors that we have are high net worth individuals from across Europe. It's too early for institutions to get into the market. And all of these investors are very aware that, you know, it's not a relatively risky market. It's a very risky market.

I mean, investment risks limited. I mean, when you're buying assets, net earnings and those earnings are growing in, you know, high double digits every year, investment risks are low. But you have geopolitical risks. I mean, it's not only Iran. It's the whole Middle East. I mean, even if you invest in local treasury bills, I mean, right now these are on the sanctions list, so you wouldn't be able to.

But local investors get paid 22%. You have dividend yields of, you know, between 10. You can very often find companies like utility companies that pay you 20% dividend yields. In the companies that GDP, you know, oil exports, it's not listed. I mean, you have a couple of refineries. listed, but it's 83 million people, but Iran plus neighboring countries is 400 million people, countries like, you know, Iraq and Afghanistan, but actually the biggest beneficiaries last year of the currency depreciation that happened the year before were domestic companies,

2018 by 70% insurance and so on, longer competitive, and it was more difficult to get them to Iran anyway. So local producers started gaining market share, and we could see that both, you know, volumes were going out for the local companies, and they were able to raise prices faster than the inflation. So actually the domestic companies. And when I'm speaking about domestic companies, it's, you know, our best positions, best performing positions were, you know, a shampoo maker and chocolate biscuits producer. And those were the types of companies that gained the most. And this is not exactly the type of investment that you're thinking about when you, when you know, go to invest in Iran. God, I already, I have so many questions. Just listening to

that. I'm already so fascinated. One thing that I've, always sort of interested in when people invest in sort of extreme emerging frontier type markets that are well out of the mainstream is data quality. So first of all, as you notice, like I can't even pull up a Tehran Stock Exchange quote on my Bloomberg. From your perspective, from your seat in London, how confident and how difficult is it to get transparent data on both sort of trading volume, the exchange, and companies themselves to the point where you can, like, feel confident that you have a good handle on who's doing what and how well? Yeah. So, and I was really surprised when I started looking at the local data.

So Bloomberg obviously doesn't cover it. So I no longer have a Bloomberg terminal on my desk. But I have like a local, and not a Bloomberg equivalent, but databases in English, where I have quarterly financial data for the last 20 years for 400 biggest stocks, plus obviously all the price data, everything in English, in a easy-to-use format, let's say maybe not similar to Bloomberg, but in this direction. Is that the Iranian domestic competitor to Bloomberg? That's too much to say, I guess, but they would love to hear that, yes. What's it called? What's it called? It's called Boor's View.

Okay. I'll do Google that later. Yeah. So this is one good source. But in terms of the quality of the data itself, companies have to report audited quarterly and annual reports, just as they are reporting in Europe or the U.S. They have local accounting standards, but they are moving towards international financial reporting standards, and the local ones are easy to read anyway. But there are two interesting things here.

So first of all, okay, you may see the data, the numbers, but at the back of your head, you have to remember that maybe you should not be trusting all the numbers that you're looking at, right? And I did invest in China a lot in, you know, Chinese companies listed in Shanghai. Even worse were Chinese companies listed in Singapore, and so a lot of fraud. So I was quite cautious here. But look, imagine that a company is showing you these were our sales last year. This was our net earnings, and our payout ratio is 90%. So we're going to pay out most of our net earnings, almost all of our net earnings, as dividend. And then you're getting this dividend, receiving this dividend into your account.

So, you know, this is something real, right? So you can no longer question whether the net earnings figure was right or wrong because you actually received most of it as dividend. And most companies have very high dividend yields and payout ratios. So this validates the data. Moreover, what I get there is actually something that I don't get in other markets, which is monthly sales data. So all the big and medium-sized companies are required to report on a monthly basis, revenue, across their main product categories and split into volumes and unit prices, which is a lot of data that you can analyze. And after two months, you pretty much know what to expect from the next quarterly

earnings. And the best thing is that not many people are doing this work in Iran. Why? Because, you know, almost all the local investors are retail investors. So think of China, Asia, or Vietnam before funds started investing there. Literally almost all of the local investors are non-sophisticated retail investors. So everyone is pretty much, you know, shorter momentum, right, without trying to analyze stuff, try to forecast any numbers. So what we are doing is actually, you know, pretty simple work. I mean, we're just doing your work, building models, analyzing hundreds of data per month for most of the companies. And it's great because for a professional investor, you know, you do your work and you get rewarded.

So, I mean, one of the big differences between being a domestic retail investor versus, you know, a sophisticated international investor is the currency conversion. How big a factor is that for you when it comes to your investment strategy and how difficult is it to get money from Iran converted into other currencies and other accounts outside of Iran? Yeah. So exchanging money is not an issue. There is, maybe right now it's better, but over the last previous two years, there was a bit of a chaos with the exchange rates. So you had, you know, three different exchange rates that were making, you know, even locals got confused in terms of which one to use and which one they should be using to value investments and so on. So you have the official rate, which basically no one is using because this is a subsidized rate to import certain pharmaceuticals. and agricultural goods, then you have the Nima plat supporters and importers are required to exchange their currency and the bazaar rate, where all the individual Iranians, without any limits,

they can just trade usually physical dollar bills right on the bazaar, which is super volatile, not very liquid, so whenever there is like a panic, which we saw many times over the previous year, you know, they were rushing to the bazaar to buy, you know, physical dollar bills. and 19, we got better in terms of economic activity because uncertainty related to into the market in Iran. But so trading currency and all the exchange rates, I mean the Nima rate and the Bazaar rate converged. So right now there is not much issue in terms of exchanging, buying, selling hard currency. The biggest problem is always a very short list of banks that are still connected to, you know, Iranian banks via SWIFT. Not all Iranian banks are on the SDN list.

There is a couple of privately owned banks that have nothing to do with sanctions. I mean, they are part of the financial system, which is under sanctions, but them as entities, they are okay. But they're usually... Do you ever worry about some risk in the future that there's some eventuality that your money could just get completely stuck in Iran, that there could become a point in which there's no banks in the West? or in Europe that you have access to that are willing to take money or take transfers from an Iranian bank? Look, think about 2015. So before Iran deal was implemented, financial system was completely cut off. I mean, no one was dealing with Iranian banks.

And yet, there was $80 billion per year of trade between Iran and other countries. So, you know, money will always find its way. And how this was done is, you know, you had hundreds or, I don't know, maybe thousands, big number of intermediaries that act as, you know, market makers between those that want to move money and move money out. And this has been actually, you know, working in the Middle East region in the Arab world for, you know, actually for centuries. So banks may be cut off, but it usually finds the way. Another thing is that in general, sanctions used to be more effective some time ago, like 10 years ago, up to 10 years ago or up to 5 years ago. What I'm seeing right now, especially on the smaller transaction levels, and many countries are embracing it, is that people use more and more often cryptocurrencies to transfer money because it's cheap and it's fast and it doesn't have any, you know, institutional problems.

I think it would be actually for all the, let's say, troubled countries from Iran to Venezuela and so on. They obviously would still like to control it, which is not that easy. So they are a bit puzzled in terms of what to do. But Iran actually legalized Bitcoin mining recently. So maybe they are going this way. Another question that I always have relating to markets like these. And honestly, even in more sophisticated, very developed financial markets, like if you hear people talk about, say, the Hong Kong market where Tracy is, they'll be like, oh, yeah, it's rife with, you know, related party

transaction and insider dealing and you have to be extremely careful. Talk to us about corporate governance within publicly listed Iranian companies. How confident do you feel that they're well run, that they're not just run for the benefit of insiders? And does this sort of speak to, again, the salience of the payout ratio metric? when you're analyzing companies in this market, basically you have to judge to see that the earnings actually make their way back to shareholders. Call the company. You want to get more information, for example. So we usually call the CFO.

When we want to understand more about the balance sheet or about the operations, sometimes they're just not interested in speaking with you. So the idea of valuing the financial investors as shareholders, it's really not clear for them. So here, you don't get good responses from them very often. You don't get good investor relations service. In terms of corporate governments, whether all the money goes back to all the shareholders or gets diverted to friends and family or whoever, well, you have to look at earnings and the payout ratio. And then if those earnings are real earnings, but could be even higher, but they are not

because some of the costs were actually friends and family. or whoever, but then I'm still paying four times for those earnings, for those smaller earnings that they should be. Well, I don't know. It could be possible, but I guess I'm still fine with it because it's four times those smaller earnings. So there is even upside to this one, right? Maybe it should be three times, real earnings.

And the situation could improve. So I'm definitely looking at valuation and a payout ratio, so understanding what's happening to this money that the company is producing. So I want to get to recent events and the escalation intentions between the U.S. and Iran, which Joe and I mentioned earlier. What was it actually like trading the market during that time? And how did the market actually react? And I genuinely don't know the answer to this, because as you mentioned, the Tehran Stock Exchange data is not on the Bloomberg terminal. We do have regional data for all the other major Middle East indices. And so I can judge from that that Iran was

probably hard hit. But I'm really curious to hear your perspective about what exactly happened. Yes. So first of all, we didn't do any trading. So we were just observing the market. On the first day after the killing of Soleimani, the market went limit down, which is minus 5%. So almost all of the stocks went limit down. So people panicked, obviously, but what was interesting is the information that half of the selling came from their trading license, which means that they opened their first brokerage account, within the last nine months, so this Iranian year.

So very unexperienced investors were new to the market. The next day, some of the local institutional investors that are in the market started buying mainly the biggest exporters, and the market wins still down, but it was something like minus 1.5, minus 2, depending on the index. So altogether, if you count the equity move plus the FX move, you're looking at, let's say, minus 10% down year to date, given the usual volatility of, you know, turn types of moves can happen very easily. Right. So at some level, yes, these are big moves, but in the grand scheme of things, for a market that's inherently volatile in a region that's very inherently volatile and in a specific geopolitical context in which one sort of always expects potential escalation. Your view is that it's not,

it wasn't that dramatic. And also, you know, S&P, you already had a chance to react positively to Donald Trump's press conference and Iran is closed because Iran is trading from Saturday to Wednesday. So today and tomorrow, it's weekend in Iran. Quick note so that people listening to this were recording at Thursday, January 9th, just something to bear in mind so that when people finally, when they get around to listening to it next week, they're aware of when this conversation took place. So what's the best case scenario at this point? I guess what's the best case realistic scenario. How in your world would you like events between Iran and the US to unfold from here? I think that the events from this week were actually quite significant and potentially very

positive. Because look, so the US assassinated the Iranian general. Iran had to respond. And it was a very significant response because for the first time they fired missiles at the U.S. military bases. You don't need anything else to start a war. So if people wanted to go to a proper military conflict, I mean, that was it, right? They could go into all-out confrontation. And this was a situation where I think the extreme outcomes became more likely. So either we have like a proper military confrontation or things actually improve from here. And perhaps you could have like a diplomatic reopening. We've been investing in Iran and Trump is president of the United States. So I got used to seeing, you know, the relations between the countries getting worse and worse each quarter. So

that's my main environment in which I've been operating. And actually after I don't think was just neutral and like, you know, oof, we managed to avoid the confrontation this time. No, I think it had a lot of positive signals talking about working together with Iran on anything, like, you know, fighting ISIS and

some with some common targets or, you know, sending a signal that the US is open to peace with any nation that is looking for it. And so on, it had a lot of positive signals. And I don't know about, you know, restarting negotiations and so on,

This could take a lot of time. I don't know if it's going to happen or when. Iran and the U.S., nations between the signals were talking to each other and also decreasing the level of tensions. So you're optimistic, politically speaking, the best year for Iran since, you know, 2016. And when you're asking me about the best-case scenario,

long-term, this is the proper integration of Iran with international financial markets, so mainly the banking system. And this will only happen when the sanctions are off sort of a deal. When going in, the frontier markets with, you know, 30% of the index or goes straight to MSCI emerging markets,

you have $10 billion passive inflow overnight to the local stock market. You're going to see a bubble there. You know, the same type of reaction where foreign investors started investing in Russia in the 90s, you know, China, when it was opening up to foreign investors, Pakistan in the early 2000s, really nice place. Russia was corrupt. functions of 30 and men square. In Pakistan, someone was blowing himself up every second day, and there was a huge from very low valuation. Very optimistic scenario, long term at some point.

In the meantime, it looks as if geopolitics are not a headwind anymore. And what we see, at the end of the day, we look at bottom up, like micro-level numbers. We see the continuation of earnings growth and many drivers for, you know, the stock prices to continue going higher. Majet, Woytel, thank you so much for being with Joe and myself. Really interesting discussion. Great. Thank you very much. Yeah, that was fascinating. Thank you. So, Joe, I found that conversation really interesting.

I probably still wouldn't invest in Iranian stocks for a variety of reasons, not least of which the fact that I am a U.S. citizen. But one thing that's really interesting is, you know, we talk a lot about emerging markets. We talk a lot about frontier markets and the notion that we're sort of seeing a vanishing of these frontier markets, a lot of them are getting upgraded to EM status as their respective economies develop. And here you have, you know, a pretty big country, 83 million people, much I said, lots of resources. And it's not even on many people's radar in terms of investing. No, it's literally not on the radar because various data services can't even, for legal reasons,

carry data. But, you know, something that I thought a lot about during that conversation is there is this notion in finance that there is some sort of positive correlation between risk and reward. So you take more risk and you get more reward. It's not actually that simple. It's not actually true. So for example, emerging markets in general are perceived as riskier than U.S. markets, but they've underperformed for the last decade, basically. Small caps are ostensibly riskier than large caps. And in theory, there should be more money on them. But in fact, they haven't actually done that well. The missing piece and why it doesn't work is because what actually gives you a reward is not just risk per se, but it's sort of like gumption and moxie and going out and acquiring information that is too costly for others to do. And so when you listen to Amache talking about investing in Iran, it's not just that Iran is, to me, it's not just. that Iran is risky, it's like the legal compliance in the lawyer in D.C. explaining how the

sanctions work, the figuring out of the banks and which banks can actually still transfer money with which banks in Europe, the work going to his limited partners in Europe and convincing them that Iran is worth investing in. And when you think about the amount of like legwork that just that it takes to invest in Iran, then you can start to understand why there may be. in theory, true profit opportunity. Yeah, I mean, it takes extra effort. That's for sure. Yeah.

You know, in some respects, it takes access in many ways as well, in the sense that some people just cannot touch that market. And others can with a lot of work, as you point out. Yeah, like, so for example, if I wanted to invest in Brazil right now, I could just log into my brokerage account and I could type in the ticker for the Brazil ETF. and it would be as easy with literally no extra effort than, you know, investing in the S&P 500. It's just changing the three or four letters that I would type in my keyboard. It's obviously a totally different story when just the mere access to the market is so much more cumbersome and complicated. You know what I really want to see, that Iranian Bloomberg-esque data service. I'm really curious about that one.

I know. I'm going to go check that out right afterward. We're going to have to look it up. This has been another edition of the Oddlots podcast. I'm Tracy Allaway. You can follow me on Twitter at Tracy Allaway. And I'm Jill Wisenthall. You can follow me on Twitter at the stalwart.

And you should follow our guest, Machia Voital, on Twitter. His handle is at M-W-O-J-T-A-L. So check his stuff out there. And be sure to follow our producer on Twitter, Laura Carlson. She's at Laura M. Carlson. Follow all the Bloomberg podcasts on Twitter at podcasts. And follow the Bloomberg head of podcast, Francesca Levy, at Francesca Today. Thanks for listening.