MACIEJ WOJTAL: 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 the 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.

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.

Why Iran?

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.

Sanctions on Iran.

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.

Understanding opportunity in Iran.

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.

Why now?

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.

What is a bigger risk, inflation or corruption?

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.

What are the biggest sectors?

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.

Drilling down on the financial sector.

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.

Sanction risks to the consumer sector.

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.

How will sanctions evolve?

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.

How do foreign investors invest in Iran?

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.

What about bonds?

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.

How vulnerable is Iran to global stress?

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.

What if oil prices collapse?

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