Proxy investments could take the risk out of rushing into Iran

‘Buy on the sound of gunfire” is one of the older and more cynical sayings of the London stock market, meaning that investors should be aware of the opportunities that exist in armed conflict.

That’s as may be, but surely we should be more aware of the “swords into ploughshares” school on investment. Peace is always likely to produce more, and more acceptable kinds of investment opportunities.

So at first glance the possible deal between Iran and the West that might lift sanctions imposed because of nuclear policy looks a no-brainer.

All investors have to do is pour their money into the country and sit back in expectation of the “peace dividend”.

The removal of sanctions is expected to lift Iranian GDP by a full percentage point in the first year, say the economists, and by considerably more thereafter as entrepreneurial-minded Iranians rush to modernise industry and to cater for the pent-up demands of domestic consumers. Western firms will be able to operate normally in Iran after a 10-year period when sanctions have been a brake on their activity.

UAE, and especially Dubai businesses, can resume their role as the Iranians’ natural entrepôt, supplying those newly liberated consumers and reviving the re-export business in the process.

Good news all round then. But there are some caveats that must be considered before embarking on a headline rush into Iran.

First and most important, despite all the optimism, there is as yet no deal. The negotiators have until June to hammer out the final details of the outline agreed in Lausanne. That leaves plenty of time for a definitive agreement to fall foul of internal Iranian power struggles, regional geopolitical pressures and Washington chicanery.

Second, oil is the main driver of the Iranian economy and the immediate target of big western firms hoping to resume relations with the country. A peace dividend at US$55 per barrel looks very different from one at $110 per barrel. An Iranian oil boom is not immediately on the cards.

Third, there is no obvious way for outside investors to get into the Iranian economy beyond direct foreign investment, which by its nature is the reserve of big investing institutions. There is a stock exchange in Tehran – one of the oldest in the Arabian Gulf region, in fact – but it is years away from being a suitable vehicle for foreign investment into the Iranian economy.

Perhaps it would be better for foreign investors who believe in the new Iranian story to look at proxy investment via those outside firms that stand to gain from the deal.

The investment experts at Arqaam Capital have crunched the numbers and come up with some very focused ways to tap into the peace dividend without the risk of going to Iran.

The trade and logistics sector stands to gain immediately from the lifting of sanctions, so shares in Air Arabia, Aramex and DP World could be obvious beneficiaries.

Arqaam recommends DP World “to a lesser extent” than the other two, given that it is a global rather than regional player.

Still, the company could be viewed as a prime play on Iran, with Jebel Ali likely to be at the forefront of re-expert across the Strait of Hormuz.

If a deal is clinched in June, all UAE banks will be looking to set up branches in the country, if only on a corresponding basis. But Emirates NBD, which already has a representative office, and Commercial Bank of Dubai, which is strong in trade finance, have a head start, and both are investable from Dubai. RAK Ceramics is another proxy, according to Arqaam. Its Iranian plant has been virtually mothballed for some years, but if revived would have the benefits of cheap materials, a cheap labour force and – with Iran’s 80 million people – a big domestic market.

The Dubai-based broadcaster OSN has media rights in Iran and can be accessed as an investment via Kuwaiti-quoted Kipco, while Saudi-quoted Savola derives big chunks of income from Iranian food products.

To Arqaam’s picks I would add UAE-quoted property companies such as Emaar and Damac, both of which are likely to generate renewed interest from Iranian buyers who see the lifting of sanctions as an opportunity to get their money out of the country on the pessimistic view that a deal will not hold.

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