How Geopolitical Tension Has Created Opportunity in Iran (w/ Maciej Wojtal)

How Geopolitical Tension Has Created Opportunity in Iran (w/ Maciej Wojtal)

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MACIEJ WOJTAL: I’m Maciej Wojtal. I’m the founder and CEO at Amtelon Capital,
which is the only European asset manager focused on Iranian equity market. Iran is a fascinating country because, well,
it’s a big country of 83 million people so it’s the size of Turkey, with the largest
oil and gas reserves in the world, so much larger than Saudi Arabia, plus many other
resources. It’s actually the biggest capitalist, its
resources, its human capital, young and educated workforce that is currently earning less than
workers in Vietnam, but eventually will create a proper consumer market over there. The special thing about Iran is obviously
that it’s been under sanctions for more or less 40 years, it has not been integrated
with the global economy. It missed on everything good that happened
in emerging markets like globalization, fallen interest rates, and with gradual opening,
which began in 2016, the country is poised to catch up. The main event was the lifting of UN sanctions
in 2016. This made it legal for everyone except for
US persons to engage in trade or investments in Iran. Obviously, US sanctions are still on and yes,
they are getting more and more strict. There are two sorts of US sanctions; you have
primary sanctions which basically say that US persons cannot do anything in Iran unless
they get a special license and you have secondary sanctions which target selected industries
and a long list of entities and individuals that no one should be doing business with. Because they’ve been under sanctions for so
long now, they had to develop a well-diversified economy to become self-sufficient, basically. Even though they have such large oil and gas
reserves, oil exports is just 18% of GDP and they have proper production and services industries
which is also reflected in the stock market, which is a liquid, large and diversified stock
market, so not many people are aware that you can actually invest in Iran where the
stock market has 600 companies listed, $110 billion market cap, more than $140 million
of daily liquidity and stocks are spread across 50 different industries, so it’s not really
a proxy on oil prices. The broader opportunity is that you have a
market that is still not accessible for most of investors. Hence, all foreign investors are less than
half a percent of the market cap. One of the effects of that is that you have
the lowest valuations in the world. You’re buying stocks at three to four times
forward earnings. Those earnings are growing, specially right
now, they’re growing at high double digits. There are two things when you think about
you run. The immediate opportunity, like the near term
is coming from– actually from sanctions because many companies, actually most of the market
cap of the stock exchange are somehow long the dollar basically. These are either exporters, which benefit
from the depreciation of the local currency or domestic companies that benefit from trade
disruptions and inputs going down. What happened over the last two years is that
in 2018, there was a lot of volatility on the market. Why? Because the US administration was imposing
new sanctions. This caused panic in any run in terms of individual
Iranians buying dollars on the bazaar, which costs the currency to go down by– local currency
to go down by 70% against the dollar. The stock market was very volatile, especially
when you measure this in the US dollar. What we actually had to do and manage to do
was to hedge our local currency exposure through the companies listed on the stock exchange
that we’re exporting. We were basically running simple models of
checking who has the biggest ETF sensitivity to US dollar price. We’ll get rid of everything from the portfolio
that we like long term and just focus on this new term hedge against the currency depreciation,
and that worked so we managed to hedge most of the losses coming from this big currency
depreciation. What changed this year– and this is a big
opportunity, is that the currency stabilized because it already went down by 70%. Actually, it seems quite cheap but the drivers
coming from this currency depreciation are now fitting into company’s earnings. Experts are so obviously are more competitive
so they are cost basis in the depreciated currency and they’re selling in dollars. They don’t have any sanctions issues, obviously
so we prefer exporters that exports in the region to Iraq, Afghanistan, to all the neighboring
countries. Actually, what is most exciting are the domestic
companies that benefit from the trade disruptions so what happened is that in many areas, all
the cheap products that were imported from China are too expensive now so they’re not
competitive anymore. Plus, it’s more difficult from the logistics
point of view because of sanctions, payments are more difficult and so on. What’s happening is that local companies are
gaining market share so volumes go up and are able to also to increase prices faster
than the inflation. Actually in many industries, we see the highest
earnings growth at the moment since at least 2013. Usually what happens after a big currency
move is that you have as boost to inflation. Inflation went up to 60% or so and it’s gradually
coming down. The last print was around 35%. We would expect that it should go down to
back where it was before the new US sanctions, which was around 10% to 20%. Look, I read about high level of corruption
in Iran, and it’s very high in the indices. However, when you invest through the stock
market, it’s as transparent as it gets because you’re not getting involved into private deals,
we are taking only minority positions in companies. It’s really not affecting us. It could affect the company. For example, when you look at company financial
statements, always at the back of your head, you need to have whether you invest in Iran
or in China, in Singapore that maybe you shouldn’t be believing the numbers that you’re seeing. One thing is not trusting the numbers, but
another thing is that when they show you these are our earnings and we plan to pay out 90%
of those earnings as dividend and then you get this dividend to your account. This is real. Because in Iran, they have this tradition
of paying very high dividend yields, so very often you can find stocks that are paying
20% dividend yields. This actually validates the numbers. When you look at the valuations and you see,
okay, so the market is, let’s say six times earnings trading PE, and I don’t know four
times forward PE, these are actually real numbers because most of those earnings are
paid out for dividends anyway. Okay, so oil and gas is actually not listed. It’s controlled by the government or state
related entities. Within energy, in the stock market, you have
refineries. This is one of the sectors that we wouldn’t
be able to invest in, because most of these companies and the sector as a whole is on
the SDN list. You have a very big petrochemical sector,
which is also tricky in terms of due diligence because certain petrochemical products are
on the SDN list, certain or not, so you really have to know how to do due diligence before
you invest in this. In this sector, you have a lot of mining companies,
from copper to zinc to iron ore, big steel industry, car companies. Iran produces 1 million cars per year. You have a lot of consumers stocks, and actually
the ones that are most interesting for us at the moment, or have been for the last couple
of months, were the consumer stocks. These were the companies which are primarily
focused domestically that benefited a lot from the collapse of imports and their competition
is basically gone, it’s been priced out of the market. Just to give you an example, our biggest position
was a shampoo maker, a toothpaste maker as well. It’s probably counterintuitive that you go
to Iran and you invest in a shampoo maker and not some oil and gas or petrochemical
stock. The best performing stock for us is actually
a confectionery stock, a biscuits producer that experienced over the last 12 months more
than 200% revenue growth and almost 400%, 350% earnings growth and the stock, the share
price rallied 650% in one year because we were buying it at three times forward earnings. These are the main sectors, I think, long
term once when there is like proper full integration of financial markets in Iran with the rest
of the world. The petrochemical sector will be very interesting,
because it’s the most competitive like in Saudi Arabia, so these two countries have
the most competitive petrochemical sector in the world. Also, when you look at Iran, it’s 83 million
people, but when you look at the whole region, with the neighboring countries, it’s 400 million
people. Iran is well positioned to export goods to
all those countries. You have countries like Iraq and Afghanistan
where you have in total, probably around 70 million people. They don’t produce much, but they have to
consume things and they import a lot of this from Iran. You have companies that are exporters, but
have nothing to do with sanctions so their products are not on SDN list and also they
don’t have logistics problems because it’s easier for them to export things in the region. The financial sector is actually one of the
least interesting sectors in Iran. Banks are not very profitable, and they will
need to get restructured in terms of the bank loans on their balance sheets. You have maybe two or three banks that are
really good quality that have actually nothing to do with the state or any sanctioned entities. These are the ones that are still connected
via SWIFT with Western banks. In general, even though we would like to invest
for banks because they give you a good exposure to the growing economy in the future, most
of the banks have to go through some restructuring first. However, in terms of how well the banking
sector is spread around the country, well, everyone has– it’s 83 million people, everyone
has at least one debit card, so card payments, online payments are very well developed. We have 50 million smartphone users in Iran. The financial services are there. This is developed. In general, Iran is very interesting, because
it’s like, in many ways, the opposite of Western markets. For example, with the economic cycle, Iran
is just coming or will be coming in a moment out of the recession. It’s at the very beginning of the cycle. In terms of interest rates, there’s still
more than 20% interest rates or yield on short term government debt, which we expect that
will have time to go down. Because interest rates have been so high,
and companies or individuals have virtually no debt over there, individuals when they’re
buying apartments, they’re buying for cash. There are no mortgages. Companies don’t have much debt and have zero
dollar debt for example. Dollar appreciation is not an issue here like
in many emerging markets. Government has also very low level of debt
to GDP. It will go up now because they are not able
to finance the budget with the oil revenue as they used to, but in general, it is still
very low. The only debt problem that I can think of
is on the banks level. A couple of years ago, they’ve accumulated
a lot of bad debts. They’ve given debts to entities related to
the state that were just never paid off or very often they invested in fixed assets such
as mines, which are just not liquid at all. That’s why they have a liquidity issue and
that’s why the most of the biggest banks will have to get restructured in terms of their
balance sheet, but it’s not like it’s not like a time bomb that is about to blow off. If sanctions get lifted tomorrow, then Iran
will go either to MSCI frontier markets, where it would be the biggest country with probably
30% of the index or more, or it will go straight to MSCI emerging markets because it’s developed
enough. This will be followed by big capital inflows. To be honest, I could imagine a scenario where
the valuations go from four times earnings to 40 times earnings and you have a bubble. In many countries that were opening up to
foreign capital, whether this was Russia in the ’90s, China in the ’90s, Pakistan or Turkey,
you saw a sudden influx of foreign capital which basically caused a bubble that then
burst and went up again and so on. Iran is before all this even started happening. In terms of the sectors that would be interesting,
I would say large caps, especially in the petrochemical sector, which are operating
significantly below their capacity so they could increase their production without making
any investments, and they will be able to export their products to many more buyers
around the world. That would be like the immediate effect. Potentially, car manufacturers would benefit
a lot because right now, they’re still operating on some very old licenses from European carmakers. They’re producing those old models. They’re not very profitable. They were one of the best performing stocks
initially in early 2016, when there was a lot of excitement and interest from European
companies entering Iran. Renault, Peugeot, all those companies were
interested in or actually signed deals with local producers. In general, I would say large expert, large
exporters will be the main beneficiaries. When it comes to domestic companies, there
will be risks as well because Iran will open up to foreign competitors so you will have
foreign companies entering the market and many of the local companies are not used to
foreign competition. It’s very difficult to forecast politics. Iran seems to be looking at this with a long
term perspective. My personal opinion would be that it’s actually
in everyone’s interest to make a new deal, and actually a better deal. Definitely, there is no appetite for military
conflict in the region. It’s just the costs would be too high for
everyone. I think, paradoxically, after the recent events,
I think that the probability of a military conflict actually went down. It’s hard to answer how long, when will it
happen? I think it will happen within the next– I
don’t know a couple of years, not more but it’s difficult to say when exactly. Well, there are I think only two ways. You can either travel to Iran yourself, figure
out how to open all the necessary accounts. Bank account, you need a bank account, but
you need to find a bank that will open an account for a nonresident. You need a brokerage account. You need to get a trading license. Look, this is what I did in 2016, what I just
went through to test everything with my own money. It was possible so it should be still possible
now. Then you can actually, though you need to
find out how to transfer money efficiently and send them safely to and from Iran and
you can invest as an individual investor directly or you can invest through a fund. In Europe, we run the fund that gets access
to Iranian equity market. Maybe there are some other funds as well. Yeah, similar process. With the bond market, it’s more tricky right
now because government bonds are on the sanctions list. We cannot invest in those. You can find corporate bonds, because equity
market is well developed, but fixed income markets are also quite well developed. You have government bonds. You have corporate bonds, municipal bonds. It’s not big, maybe everything is around $5
billion but it’s there. The problem is that they don’t have the full
yield curve. Everything is focused on the short term, maybe
to some medium term maturities. It would be the same process if you wanted
to invest in the bond market. Right now, because of those strong macro drivers
that are affecting earnings, well, I think that equities are a much, much better opportunity. Because Iran was closed for many, many decades
actually, and still, most of the capital just cannot flow there easily, it is a purely idiosyncratic
story, because when you have a risk off in global markets, there is no capital that will
be flowing out of the country because it hasn’t flown into the country yet. This is one thing. Secondly, it also gives you much more potential–
because it’s a closed country, it gives you much more potential for inefficiencies in
the market. Look, if you have a frontier market, there
is like really good opportunity, it’s just difficult to access, I don’t know somewhere
in Africa or somewhere. If capital really wants to get there, it will
get there, but here in Iran, it’s just not possible. That’s why foreign investors are just less
than half a percentage of the market cap and that’s why the potential for mispricing on
the market is much bigger and we can see this. We can see that– there’s a couple of examples. For example, I don’t know when companies issue
share rights, those rights trade all over the place, and it’s not difficult to just
check the value of those rights. Another thing is that actually, it’s a pretty
well developed and regulated market and in terms of reporting standards. Local companies not only report annual and
quarterly earnings, but they also have to report monthly sales data and the sales data
is broken down into volumes and prices per main product. After two months, we pretty much know what
to expect from the next quarterly earnings. The good thing is that not many people do
this in Iran. Why? Because most of the local investors are non-sophisticated
individuals, a bit like Vietnam or China, iShares before big funds started investing
there. It is actually fairly easy to outperform the
market because the other investors are basically a short term moment. Okay. Something similar to the collapse of oil prices
has already happened in Iran over the last two years, because their oil revenues collapsed,
not because of the price, but because of the volumes. This is visible on the budget level and the
government needs to issue more debt but the economy is actually doing pretty well, especially
when you look– and this is what we’re doing. We’re looking at the performance of companies,
of industries not related to oil and gas sector. For us, Iran is potentially the biggest transformational
story since Russia in the ’90s and we think one of the most exciting markets for the next
decade. You have the lowest valuations in the world,
an idiosyncratic story which should not get affected even if a recession kicks in globally,
where you don’t have any foreign investors on the local market so all the future flows
will be coming into the country. It doesn’t really happen that often that you
can actually go into a big market like Iranian stock market and invest before all the big
funds, Golder, so we can position yourself before them.

44 thoughts on “How Geopolitical Tension Has Created Opportunity in Iran (w/ Maciej Wojtal)”

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  2. Pretty disingenuous to post this now despite being filmed in September. How does it feel to try and take advantage of a potential armed conflict to make more subscribers? Not faulting Wojtal, I'm sure he had no say in this being posted today. This actually made me unsubscribe. Raoul what are you doing?

  3. What a shame.. The empire is about to turn this rich and vibrant culture, along with its young, educated and progressive population into a smoking pile of blood, guts and depleted uranium shells

  4. there's a lot more upside in iran than there is in the us or uk. . . .the west is dying–thanks to their propensity for murdering brown and yellow skinned folks around the world. when china sinks the us into the sea iran will shine. Persians are smart, beautiful and highly educated.

  5. How do u take the supposed profit with staggering exchange rates?! The rate from local currency to viable foregin currencies, that is if it can be done stright forwardly is huge. Since 016 to Jan 020 the rate has jumped 4 fold. Besids, Iranians themselves beging savy Bazzer orientated characters mostly have held back until this hated Islamist regime is toppled. Yes. The country will have enormous potential after the Islamist terrorist structure is replaced by a modern free enterprise commited government. Frankly… as a last word,
    I am relieved that this fellow wasn't taken hostage while visting the Mullahs in Iran evaluating prospects! Being a Hungarian has been a blessing dare say! Otherwise…, if Western European or haven forbid a US citizen he was… Could wager LONG he would been taken hostage till some future unkown date a hastily ransom deal provided through some naive gullible Western intermediary duped like…., (john Karry) or, the concubin of Javad Zarif, F.Mogherini EU's foregin Rep, furnish release..!!!

  6. The timing of the release of this video reminds me of my timing in making investments… You've done your research, made the necessary preparations, managed your cash-flow, invested and then the world be like: 'lol, no'

  7. This is the most nonsense I've seen in ages! Their currency dropped by 80%, unemployment is over 35%, the entire banking system is at the verge of collapse due to FATF,…… and the rest of the stuff is owned and managed by revolutionary guards! A fantastic place to become a millionaire (if you were a billionaire before the investment 😂)

  8. 0:25 "largest oil reserves in the world, much larger than Saudi Arabia"

    Oooooohhhhhh, THAT'S why they're in desperate need of liberation, military intervention and western style democracy!

  9. Is this video title some kind of sick joke? Who in their right mind is going to br investing in this basket case of a place?

  10. So ah um ah, his portfolio would be worthless without sanctions. Yet he suggests these consumer products could be competitive internationally in a post sanction scenario.

  11. This dude needs to get real. As long as Iran continues to be hostile to it's neighbors they are going to continue to be isolated. This guy is a dreamer.

  12. This guy is not ready for prime time. The Iranian stock market and its economy, in general, are too exposed to all kinds of risks be they political, financial, exchange rate, military risks, etc., to be an investment worth risking. Not to mention the very real risk of a popular uprising and revolution of ordinary Iranians fed up with the abuses of its corrupt theocratic government.

  13. Lifted sanctions threaten the petro-dollar. I don't see it happening soon which is why countries are creating parallel trade systems to transact with them.

  14. Great POV. never thought of Iran till now being an invest opportunity. Thank you real vision for another quality discussion.

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