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Clemente Cappello

IRAN - Finance

Eastern Promise

Founder & CIO, Sturgeon Capital

Bio

Clemente Cappello has a ten-year track record of investing in the Silk Road region in Asia and has developed an intimate knowledge of the investment universe across each of the strategies employed by Sturgeon Capital. He holds a degree in business administration and finance from Bocconi University. Before founding Sturgeon Capital he worked as an analyst for Haussmann Holdings, and has previously worked at HSBC, Bear Stearns, and Goldman Sachs. He was awarded ‘Rising Star of Hedge Funds’ in 2008 by Institutional Investor and has been quoted by the Financial Times, New York Times, Bloomberg, Fox News, CNN and other media outlets. He is cited as an expert on Central Asian and Iranian markets.

“Trump talks tough on foreign policy, but he is also a pragmatic businessman.“

Sturgeon was one of the first funds to enter the Iranian market. How was the process of due diligence in establishing the fund?

We have been investing in the region for more than 10 years and started coming to Iran in 2011. Following President Rouhani’s election we saw that the country was opening up, so we started working on a fund, hiring the best and most expensive law firms in London to make sure everything was good and that the fund was fully sanction-compliant. We ended up launching the fund two months before the lifting of sanctions on December 1, 2015. For the first two months we were in beta mode, wiring money in, buying and selling stocks, and then wiring money out with internal capital to make sure all the plumbing and structure worked to see if we could get money in and money out without any problems. We found that we could indeed do that. A year before launching the fund, we started the due diligence process, and a key issue was service providers. Many were skeptical about dealing with Iran because of sanctions. This was after the deal was agreed but before the implementation date. During that time we were ready to invest but the fund was constantly being delayed. We went through the 550+ stocks of both exchanges, looking at the key stakeholders, looking at the management to make sure they were not sanctioned companies, and looking at shareholders as well, going five layers if necessary up to see who controls each company. Out of 550 stocks, we ended up with 50 stocks that we thought were investable. We started investing in those. Then in mid-January it was the implementation date, and so from 50 stocks we went to 550 stocks, although there are still four or five stocks that we cannot touch. Our investable universe is 550, and we have about 20 positions.

How would you rate the standard of financial reporting, regulations, and infrastructure in Iran?

I would rate it seven to eight. We have been dealing with other frontier markets in Central Asia, and we have experience in these markets. The stock market infrastructure in Iran is well developed. The traders, brokers, stock exchange, and central custodian are all well developed. Certain service providers, like Bloomberg, do not cover Iranian stocks, but there is a local Iranian Bloomberg, which is extremely good, called Pouya Finance. It is a subsidiary of Mofid, the largest full service broker in the country, who also are our local investment advisor. The local stock market infrastructure is good, but the problem is that it is not connected to the outside world. When sending money abroad, it is complicated. Normally when trading a stock, it is bought via the broker, and then the stock goes to an account in a custody bank. That custody bank does not have a relationship with the local custodian. It is not bad per se, but not being connected means big investors will not invest in a country where the global custodian doesn’t have a deal with the local custodian. Regarding transparency, the stock market is transparent in terms of quarterly guidance, which is very detailed. They have to provide quarterly guidance by law, and if they do not respect that guidance by a difference of more than 15%, they have to explain why. So it is a very detailed guidance system. Most recently, the local regulator has mandated that all listed financial companies and companies with a market cap above USD200 million, to amend their financial statements to be in line with IFRS standards. On the other hand, however, investor relations are not developed, so it is tough to get meetings with companies. Saying we are investors is not enough to get a meeting, so we have to do it through our network or tell them we can help them with getting cheaper finance from abroad, or help them get access to some of the Caspian countries. We have to be creative.

What are the main opportunities and risks that investors need to be aware of before entering the Iranian stock market?

The risks are that we are seeing that people are obsessed by politics and the very negative image that Iran has abroad, and it is difficult to go beyond prejudice. Image and perception are certainly a challenge for Iran. But the West is working more closely with Iran, and more people are going to Iran with more Iranians also traveling abroad. That is the most important thing—people seeing for themselves what Iran is like on the ground. That will help deal with the misconceptions that predominate worldwide. In general, investors perceive political risk to be overvalued. Some forget that Iran is made up of individuals, like any other country, and every company is managed by people, and every company is different. You have to analyze them, the management, their clients, markets, suppliers, how they work, and who they are. You have to go company by company and do your homework. There are good companies and bad companies like anywhere else. As it relates to the opportunity set in Iran, relative to many parts of the world, from an investing standpoint, it demonstrates characteristics that set it apart. Places like Japan and Europe are suffering from terrible demographics, Iran has 65% of its population under 35. Today there is nearly USD13 trillion in negative yielding debt. Iran has 13% real interest rates. Most of the world is set for what will eventually be a rising interest rate cycle, Iran is seeing interest rates fall from the mid-20s to the single digits. And finally, whilst many countries struggle for economic growth, Iran is coming out of a recession where for 2017 it is set to grow 6.6% as forecasted by the IMF. Within the scope of this, given foreign portfolio investment is still only 10bps of the stock markets market cap, there are many areas investors can find opportunities. The Price/Earnings is around six and average dividend yields in excess of 14%.

How does Iran factor into Sturgeon Capital’s broader agenda of investing in private equity, liquid equity, and fixed income across the New Silk Road?

The general view is to cover the Silk Road, and within that to offer investors the opportunity to invest as they please in Silk Road countries, whether its private equity, stocks, investing in oil, whatever. The vision is to give investors access to remote markets that have been otherwise difficult to access, to give them ease of access, work thoroughly on research and due diligence, while being based in London but also having local presence and bases. That is our vision. This region has been key for thousands of years, and I have no doubt it will become the center of the world once again.

What’s your outlook for the Iranian economy in 2017? Do you see a potential snap-back effect of a Trump administration re-imposing sanctions on Iran?

First of all, the JCPOA is an international agreement with signatories including Iran, the US, UK, Germany, and France. The sanctions are a modern version of an embargo. Embargoes work if everyone implements it. If Europe doesn’t implement the embargo, then the embargo does not work, because Iran will do business with Europe instead of the US. So the US situation today is a self-imposed embargo, except in the financial sector, where because the dollar is a reserve currency, you can essentially implement sanctions globally. But in trade, you are basically cutting yourself off from trade relating to Iran. Of course, an American foreign subsidiary can trade with Iran as long as American officers are not involved, so it is more complicated than the way I am putting it. But from a rational standpoint, if I was an American company, I would be jealous that Europe is doing business with Iran and they cannot. So I think American businesses will start lobbying the US government to do business with Iran. Trump talks tough on foreign policy, but he is also a pragmatic businessman. So let’s see which of the two prevails.

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