Iran Is Worthy Of Analysis Again

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Includes: EMFM, FM, FRN
by: Fraser Dinnis

Summary

Current agreement between Iran and the United Nations expires on November 24th. A deal looks likely.

The next big frontier market may finally re-open.

Question is whether U.S. will move as quickly as EU and certain Asian countries.

Companies should prepare an 'Iran Strategy' just as they had to prepare a 'China Strategy' in the 1990s.

The Rise and Fall of Momentum towards a Sanctions Deal

The election of President Rouhani in July 2014 delivered a frantic few months of excitement about a new liberal attitude in Iran, the promise of further relaxation of economic sanctions and the reintegration of Iran into the global economic community:

President Rouhani spoke (impressively) at the United Nations; held a telco with President Obama; an over 120 person French trade delegation visited Iran...there was clear momentum towards reaching an agreement in July.

Then disappointment. It is impossible to point a finger at any single event...certainly the Russian incursion into Ukraine deflected attention, the movement of ISIS within Iraq was also a deflection and Rouhani has not been as dramatically reformist as many of us hoped. However, as July (the previous deadline) passed with no improvement in relations and the year wore on, the momentum was broken. In Iran, there was an increasing sense that sanctions would remain for some time and the country returned to 'business as usual'

However, we may well be in for a surprise and an agreement be reached by November 24th that will permit the momentum to build up again.

  • There are clear indications from Washington that the US administration are keen to secure a deal.
  • This is perhaps President Obama's last opportunity to secure a foreign policy legacy (and following the Republican congressional wins this morning, he is unlikely to make many domestic initiatives)
  • There are indications that Russia is co-operating to take control of Iran's uranium stockpile in a way that satisfies the West that Iran cannot quickly start a military nuclear programme.
  • The P5+1 (US, UK, Germany, France, Russia, China) and Iran are clearly negotiating hard having met in Oman and now continuing in Vienna.
  • Front page articles in The Economist suggest a confidence that Iran is about to re-enter the mainstream news cycle.
  • The fight against IS requires co-operation between Tehran and the West.

I covered the opportunity with Iran in a recent article here so I won't repeat, but since then a variety of factors have increased the need for focus on this issue. These include:

  • The world is becoming increasingly divided. Investors should be seeking out countries where the trend is out of division into unity rather than the increasing division which currently dominates.
  • Oil prices are slipping and have fallen 30% since June. Iran will rush to increase production and sales thus increasing supply and placing further pressure on forward prices.
  • Independent strengthening of an alliance between Russia and Iran is hardly in the interests of the US or EU.

Consequences

EU firms are on their starting blocks awaiting the green light to re-enter Iran. The engagement to date by Germany, France and Italy suggests that this will be given as soon as the P5+1 loosens UN sanctions. They could be big beneficiaries if the US is not as immediately open.

Equally, many/most Asian countries do not have bilateral sanctions on Iran but rely on UN sanctions. As such, an agreement with the P5+1 may provide an immediate green light to Asian firms.

This is why The White House has recently been making comments that they can relax sanctions without securing congressional approval. Delays of this nature could place US businesses at a competitive disadvantage as EU and Asian firms sprint ahead of them.

Conclusion

As Charles Robertson, Chief Economist of Renaissance Capital said, "Iran is the biggest opportunity of the next 10 years" There will be many winners and some losers but the opportunity is big enough to be a material factor in share price movements over the coming year.

On its own, the opening of Iran and the ability of the EU to beat the US to securing a solid foundation in the country will not solve EU problems, but just as it was prudent for almost every major company to have a 'China Strategy' in the 1990s, as soon as sanctions are relaxed, investors should favour companies that can communicate a clear 'Iran Strategy'.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.