Iran: in the rial world

Frontier markets are places to go looking for the future. That makes them geopolitical equivalents of biotech stocks: normal valuation comes second to upside from long-term transformation. A bracing bet, but one many are willing to make. If they can: to paraphrase William Gibson, the future is already here, but it just isn’t very evenly distributed.

Take this week’s rebasing of Nigeria’s GDP, which made it Africa’s first $500bn economy. The country’s potential looks even greater now, given an equity market capitalisation of only $76bn. But that can also be said of another $500bn frontier economy, with a stock market that is more than double Nigeria’s in size and which rose about 130 per cent last year.

Iran. The country is admittedly rather further off the beaten path. Sanctions still impede foreign investment despite progress on a deal over the country’s nuclear programme. The Tehran stock exchange also operates under different rules. Shares cannot be shorted and may only move 4 per cent either way each day.

Still, talks on the hoped-for nuclear deal restarted on Tuesday. Officials from the stock exchange may visit London this month. They will face questions about continued risks from sanctions. But such questions are also likely to be asked of Russian companies now, and Moscow is a $500bn stock market that has not rerated in years.

Patient money that waits for an opening in Iran may fare better. Like Russia, many companies are linked to the state (often through Revolutionary Guards ownership), but the IMF has called energy subsidy reforms “exemplary” – not a judgment often heard in frontier markets. More broadly, think of an economy such as Turkey’s but with a current account surplus and a tenth of the world’s oil reserves, as Renaissance Capital has put it. The Istanbul market trades with a price to forward earnings of 10. Tehran’s top 20 stocks by market capitalisation trade at 7.5 times. A piece of the future to think about.

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Copyright The Financial Times Limited 2014.