Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

For Iranian President Hassan Rouhani, the lifting of sanctions brings "the opportunity for an economic leap." Foreign financiers are going to take some persuading to make that jump.

Iranian Discount
The country's stock index trades at a smaller multiple of earnings than other benchmark indexes
Source: Bloomberg News

Certainly, Iran offers potential following years of exile.

Overseas investors note the country's stocks look cheap next to those in similar countries. The benchmark TEDPIX stock index trades at a measly 5.7 times earnings, according to Bloomberg News. The MSCI Emerging Market index trades at 10.9 times earnings and the MSCI Frontier Markets Index is valued at 9.44 times earnings. The Tehran Stock Exchange includes 318 listed companies with a total market capitalization of about $90 billion, according to its website.

Iranian Industries
Top sectors by percentage of total market value
Source: Tehran Stock Exchange

The economy is also expected to outpace its regional peers. The World Bank forecasts growth will rebound from 1.9 percent in 2015 to 5.8 percent this year and 6.7 percent next year. That will outpace the wider Middle East and North Africa region, estimated to reach 3.8 percent in 2016 and 4.4 percent in 2017.

Faster Growth
Real GDP growth in Iran is expected to outpace the wider region
Source: World Bank
Note: 2015 figure is estimate; 2016-8 are forecasts

Economic diversity is a strength too. Although oil and gas is a key driver, investors are eyeing banks, telecommunications and retail as potentially hot industries. Infrastructure bankers spy potential fees in massive oil and gas reserves and underdeveloped infrastructure that require funding.

But turning a quick profit in the country won't be easy.

For starters, investors could find themselves caught in a crush of foreigners trying to get in. When western sanctions on Myanmar were lifted in 2013, there weren't enough decent hotel rooms in the country to accommodate the flood of bankers that showed up. That won't happen in Tehran's modern urban center. But a rush of foreign money could push up asset prices quickly.

Most important of all, though, there's the fine detail on sanctions to work through. Iranian officials hailed the lifting of nuclear sanctions at the weekend. But Western institutions will be cautious while many of the country's institutions and individuals are still restricted under terrorism prohibitions.

In particular, the banks that grease the wheels of international finance will be desperate to avoid the risk of fines by U.S. regulators for compliance failings. It's less than a year since France's BNP Paribas was fined $9 billion for sanctions violations. London-based Standard Chartered has paid almost $1 billion to U.S. authorities in recent years over similar allegations. The prospect of more fines will surely curtail bankers' exuberance -- and cross-border flows of financing will move slowly until all the right boxes are checked.

There's political risk too -- the recent flare-up between Saudi Arabia and Iran is a warning -- and the possibility that economic growth doesn't materialized as hoped, especially because of sliding oil prices. Brent crude traded near a 12-year low in London on Monday.

Still, such are the problems of investing in developing economies. Investors looking at Iran ought to know what they're getting into -- and banks will be especially wary of the dangers.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net