Maciej Wojtal (00:03:40):
So Iran is similar in many ways. And yeah, so what you refer to this Warren Buffett quote, is actually makes sense in those markets, because you just want to be long. You just want to be long, the stock market, your investment strategy doesn’t have to be complicated. It probably shouldn’t be complicated. You don’t have to go into, I don’t know, derivatives. Well at those stages in those markets, the derivatives markets are probably not well developed anyway. So you just have to be long, right? A long, beta and that’s it. And you’ll be happy. What he also said, I think, it was part of the same quote that, the execution of this investment strategy is important. And those markets, execution means actually getting this exposure, being able to invest early before all this happens, before all other investors access the market. And it’s the same in Iran. One more thing is important.

Maciej Wojtal (00:04:34):
Not all markets when they open up, not all markets have well developed capital markets. China had a stock market. Russia had a stock market. Poland had a small stock market. But there are countries out there that where… North Korea will open up at some point, might be interesting, but there is no capital market. So you can launch a startup or set up a bank, or buy a factory there, those type of opportunities, but nothing to do for a portfolio investor. So Iran is more similar to the opportunities like China, Russia, Eastern Europe, because it has a well functioning, liquid stock market with the lowest valuations in the world, which we can talk about in a moment. And all foreign investors, all the foreign money invested in the market, it’s less than half a percent of the market cap because it’s really difficult to access it.

Maciej Wojtal (00:05:25):
And it’s not only difficult to access it as in China, Russia for years ago, because it’s difficult to open a bank account. It’s difficult to get a local license. You need a special trading code for foreigners. There is much more administration around it. Right now it’s just impossible to opening non-resident bank account. So you have to become a resident, which is also not easy. And you know, a lot to do just to invest in the market. But also, in case of Iran, you have sanctions, you have US sanctions. And then sanctions, you have to understand sanctions. So you have many different levels of sanctions. You have UN sanctions, EU sanctions, US sanctions. The most broad comprehensive ones are the US sanctions. And they say that US investors cannot invest at the moment in Iran, but everyone else can. All the European and Asian investors are allowed to invest as long as they don’t invest in certain sectors or certain entities or companies controlled by certain entities, if they don’t want to violate US sanctions.

Maciej Wojtal (00:06:27):
So this is a big homework to do. You actually have to do due diligence on every single investment you do. We hired a Washington based legal advisor who used to be the advisor of the National Security Council at the White House. And before, he was at the State Department to advise us on sanctions, to advise us on our due diligence procedures, to tell us if we can or cannot invest in particular industry or a company. So it’s really a lot of work to do. And now, so these are big obstacles that’s why it’s similar, that’s why when these obstacles are removed, we do expect waves of foreign investors. Initially, they’ll be coming from Europe and Asia and then to come from US, you will need to have additional sanctions, primary, US sanctions removed.

Maciej Wojtal (00:07:13):
But actually, Iran is much more than just China, Russia, and Poland in the early 90s because of the same sanctions. The other countries just opened up to the flow of foreign capital. Iran will also open up its economy. Right now when you look at Iranian companies, you have exporters. For example, petrochemical exporter, most profitable petrochemical companies in the world, just like in Saudi Arabia, highest margins. But if you are an Iranian exporter and want to sell your products abroad, it’s difficult for you to find investors because it’s Iranian, people know there are sanctions. So they don’t know whether they are allowed to buy products from you or not. So you have to entice them by offering discounts. So the selling prices that you’re realizing are much lower than global prices that other companies are realizing. Then try to get paid. If you’re Iranian company, banks don’t really work. The connections between Iranian banks and foreign banks, try to get your products insured, try to arrange logistics.

Maciej Wojtal (00:08:13):
All of this is very difficult, which means that you pay much more for it. So it’s additional 5% for transferring money, two and a half percent for shipping, a couple of percent for insurance. All this eats into their margins and also decreases their volumes. So opening up of a country, in the case of Iran, will mean, for example, for Iranian exporters, volumes going higher, then at the same time, margins going higher. Profits will react very strongly to this. So this is on the company level, but also if you look at the macro level, Iran pretty much for the last 40 years has been under stronger or lighter, but always some sort of sanctions. The economy of Iran has been also not expanding as it could have because of sanctions. Inflation is higher because of sanctions. So what happens when sanctions are lifted, when the country opens up?

Maciej Wojtal (00:09:09):
First thing that we will observe is that Iran can export much more oil. And this is very important because suddenly they export 2 million barrels per day, which means anywhere between 50, maybe $80 billion of additional revenue per year for the country. And this solves all the problems. This solves the problem of the budget deficit. So they don’t have to print as much money as they’re printing, which obviously impacts inflation. This means that their current account will look better. Iran is a country that before the last wave of sanctions, they were running a strong surplus in trade balance in current account. And this will be the case in the future as well. With that, the currency stabilizes when the local currency, which is Iranian rial is not depreciating anymore. The inflation, the price is stabilized. So the inflation is no longer a problem. So there is no reason why inflation is not going back to around 10%.

Maciej Wojtal (00:10:07):
When you have stable macroeconomic landscape, stable prices, interest rates will go down obviously, but also, it will be possible for the local companies and local consumers to plan ahead, to plan a couple of years down the line, which will support investment spending. Also, lower rates will mean better access to money, to financing. And better visibility because of stability, will mean that people will be more eager to make long term investments. Iranian population lost on sanctions the biggest way, meaning that their spending power got hit the most. Manufacturers actually did pretty well because many of them are exporting. So when sanctions hit, currency was depreciating, their competitiveness was increasing and they were making a lot of money. But consumers were hit with stable macro economy. Also, consumers will start feeling better. So their spending power will increase, the real spending power.

Maciej Wojtal (00:11:07):
What I wanted to say is that opening up of a country, in case of Iran, means not only the inflow of money of direct investments, of portfolio investments from outside of Iran will mean accessing foreign financing, but it will also mean profit growth for the local companies. But would also mean a massive credit impulse, a massive credit boom, because there is no leverage in the economy at the moment. Companies don’t have much debt. With high interest rates, there is no debt. There is no, obviously, hard currency debt zero. Also individuals, they’re not indebted. So everything will happen in the future. So before all of these things, were starting. So that’s why the comparison to China, Russia, Poland is good and is interesting because it shows you the potential for the sudden increasing prices. But there is much more to it, much more going on in the country, in the macro and on the corporate level in Iran when the country opens up.

Stig Brodersen (00:12:08):
So it’s probably not an understatement to say that some of the worst [inaudible 00:12:12] you have here in the world that might come from Iran. And even if you don’t think about the political situation, I think a lot of people would think oil and gas whenever they think Iran. I was a little surprised whenever I learned that it was only 15% of GDP, probably tells you how ignorant I am about Iran. I thought it was significantly more. So perhaps if you can elaborate a bit on your 30,000 feet view of Iran’s investment and maturity, because there are some interesting things about the demographics, the number of listed companies, there’s a lot to unpack there for Iran.

Maciej Wojtal (00:12:43):
Iran is completely misunderstood because it’s been under sanctions because it’s been shut down, there are not too many foreigners in Iran, investing or living. So people just don’t know. And Iran, so starting with the very basic facts, is a big country of 84 million people with the median age of around 30 years with the beautiful demographic profile. And it’s located in the region between Middle East and Central Asia. So it’s very important because Iran benefits from its location because it is, for example, on the way of Chinese China’s Belt and Road Initiative, and very important country between Europe and Asia. But it’s also important because Iran plus all its neighbors, it’s more than 500 million people. It’s like second Europe. And Iranian companies have very good connections in the region. They are well placed to export in this region. So the whole market, when you look at Iran for those companies, say, okay, 80 million people, but then many regional exporters export to the market of 500 million people. That’s why they can gain enough scale. And for example, sustain through sanctions.

Maciej Wojtal (00:13:56):
But what is very important is the quality of people in Iran. So the education level, so tertiary education enrollment rates are similar to Europe. Iranians have 5,000 years of written history and there is a strong sense when you speak to Iranians that they understand this and that there is this heritage, strong culture heritage, and that education has always been important. So you get very strong quality of people that you can employ and wages are lower than in Vietnam. It’s as ratio of cost quality, probably the best country in the world. Now, when it comes to the economy, indeed, Iran has the largest combined oil and gas reserves in the world. But it is only, right now, it’s actually less than 10% of GDP. It used to be 15% then because of sanctions, now, Iran is exporting much less oils, so it’s less than 10%, for sure.

Maciej Wojtal (00:14:55):
And the rest of the economy, it’s a well diversified economy. You have a lot of manufacturing. They produce more than a million cars per year. So while the industry is related to car manufacturing and the steel industry is huge, auto parts, then petro chemicals industry is very important. So all this makes it a well diversified economy that is self-sufficient to a large extent. So they don’t import a lot of goods. They do have to import some essential goods, some food products, some pharmaceutical products. But the majority of what they consume is actually they can produce themselves. These are good things about having sanctions for a couple of decades, that you don’t have a choice. You need to develop all those different industries so that your economy can function properly.

Maciej Wojtal (00:15:39):
So yes, it is rising because when you look at Iraq or Saudi Arabia, more than 90% of GDP is coming from oil. And in Iran, those commodities, so it’s not only oil and gas, it’s also metals like iron ore, zinc, some other industrial metals deposits as well. This is an additional feature of the Iranian economy that can help to kickstart the growth and help finance infrastructure investments, for example. So this is important. But the biggest opportunity is actually in the non-oil part of the Iranian economy and in the resources, that’s the main resource of the Iranian economy. And this is also reflected in the stock market. What struck me, I mean, I was very surprised to learn that the stock market has 600 companies listed across 50 different industries and there is no oil and gas on the stock market. So it’s not a proxy on oil prices.

Maciej Wojtal (00:16:32):
You have petrochemicals, telecoms, steel companies, pharmaceuticals, lot of different manufacturing companies, software companies, consumer staples, FMCG companies. So really like a proper well diversified market. The market cap is around $250 billion. So probably one of the biggest frontier markets. If it was classified as a frontier, it would be one of the biggest frontier market with proper liquidity. So the average daily liquidity last year was around $400 million. $400 million of trading per day in Iran with no foreign investors. All of foreign investors are, as I said, less than half a percent of the market cap. So it’s all local money driven by individual retail investors. So you have one to 2 million retail investors that invest probably around $100 on average. And this makes the market very inefficient, which is very interesting as well for professional investors. It’s a bit like China A-Shares before hedge funds started investing there or Vietnam at an earlier stage before institutional investors got involved.

Maciej Wojtal (00:17:43):
So this was what struck me when I started learning about Iran. One thing is how well developed the country is. Then absolutely how I enjoyed meeting and spending time and talking with the local people. And they’re super friendly. I mean, another misconception about Iran, because of political reasons, the whole country is often portrayed as the country of, I don’t know, terrorists or some dangerous place out there. And when you go to Iran, if you travel there by yourself, you see that if you go around different cities, you meet people. If they speak English, they will approach you and have a chat with you. They don’t have too many tourists. So everyone is curious. Everyone is super friendly. So not only neutral, they’re friendly and want to have a chat, want to get to know you. It’s a very tolerant society.

Maciej Wojtal (00:18:34):
So obviously, Iran as a country is Muslim. It’s a Sheer Muslim country. You have big minorities, Sunni minorities, Jewish minorities, Christian minorities. I was going around site seeing different churches, was going to Jewish synagogues, Zoroastrian churches, Christian churches, and everyone is doing his thing. There is no police in front of the church. It’s open and the society is tolerant. More than that, you actually have permanent seats in the Iranian parliament for the Jewish minority, Christian minority, and the Zoroastrian minority, so that they are also represented in the parliament. Again, the situation with women. So I guess that people in the West who don’t know, who don’t understand Iran, probably only notice that women in Iran have to wear hijab, right? That this is compulsory to cover your head. But when you look deeper, actually, the majority of students are women from the top universities in Iran. When you start to get to know the local families, you understand that households and household budgets and the most important decisions they are run by women. They actually control the households.

Maciej Wojtal (00:19:48):
And when I meet with women in professional jobs, working in banks and so on, they are the best educated with the best English, doing really important jobs. With countries like Iran, it’s so important, it’s so good to go there by yourself, and actually not only do your own investment research, but get to know the country, start to understand its culture, its population. So this was a very surprising, positively surprising thing to observe. And I had no bias. I mean, I had never met an Iranian in my life before my first trip to Iran. I went there for the first time in 2016, when the JCPOA was signed, so the Iran nuclear deal was signed. The UN sanctions were lifted and it became legal for non-US people to invest in Iran. So this is the first time I went there.

Maciej Wojtal (00:20:39):
I didn’t have any contacts. I just made a couple of appointments via email with local banks, with local brokers. And I was just going out and meeting people, meeting in the hotels, meeting in the restaurant and enjoyed every minute of it. So Iran not only has the worst PR because of those misconceptions about the population, there is absolutely no knowledge about its local economy and about the local capital market. The capital market exists that there is a liquid deep diversified stock market where you can buy the cheapest assets in the world and you have no competition from foreign investors.

Stig Brodersen (00:21:17):
Let’s talk about the stock market. Please, first talk to us about why you don’t look at the performance in the local currency and how the stock market has performed in dollar terms?

Maciej Wojtal (00:21:28):
I don’t really check the performance in the local currency. So the honest question is, I don’t know. Because in a country where you have high inflation, the stock market will always be booming than the local currency. So it doesn’t matter if it went up by 1000% or 2000%. Then as well as Zimbabwe, when you look at the stock market in local currency, they have stock market, also look good, but they are not a comparison to Iran because they don’t have real functioning economies with proper companies. So when you observe them in dollar terms, there is nothing interesting. In Iran, in dollar terms, there’s a couple of things to say here. First of all, the main index was launched in May 2008. It has 13 full years of historical data. And it’s astonishing to observe that your dollar return from Iranian assets over those 13 years was more than 13% per year annualized.

Maciej Wojtal (00:22:26):
So if you invested in Iranian equities as a foreign dollar investor, back in May 2008, and held it for the following 13 years, you would be annualizing 13% in dollars per year. Now, S&P 500 over the same period, it’s a bit less, it’s 12 and a half percent, I think. Doesn’t matter if it’s a bit less or a bit more, it’s similar. And S&P 500, obviously, the biggest economy in the world, the most innovative economy in the world. In the meantime, you had technology boom, you had Apple, you had Amazon, all the good things that happened there. And Iran is the country that had been under sanctions since 2008. It had two episodes of currency depreciating more than 70%. It had US sanctions, UN sanctions. It had a populous president in the meantime, who actually caused the depreciation and the UN sanctions. The sentiment about Iran, its either sanctions, or it’s about to be war in the region or something like this. Right?

Maciej Wojtal (00:23:34):
So with all those bad things happening around Iran, the stock market still outperformed S&P 500. And I mean, total return here and there. This is astonishing. I mean, I was surprised when I checked this. Obviously, with huge volatility, the volatility is coming from the FX, because the FX is the asset class that reacts to all the geopolitical tensions. You had many drawdowns up to 40, 50% drawdowns. But then you had strong rallies because the market was rallying after the current struggles. We can talk about this in a moment how it works. But this was astonishing. So 2016 was a big hope because the nuclear deal was just signed. The market had initial quick rally of, I think, 30, 40% in dollar terms. Then it started going sideways. 2018 was tough because this is when the currency dropped by, I think, 75% in one year, so Iranian rial versus US Dollar.

Maciej Wojtal (00:24:31):
Now, what that caused is that the following year, so 2019, Iranian equities in dollar terms pretty much doubled, and this was the best performing market in the world in dollar terms. And then the following year, so 2019, it also was a very strong year. So 18 sanctions, 19 strong bull market that continued into 2020. Overall, from the beginning of 2019 to the end of 2020, the market in dollar terms tripled more or less, or even a bit more than that, despite US sanctions. So how was this possible? Is because the majority of the companies that are listed on the stock market are positively correlated with the US dollar. Many of these companies are actually dollar assets that just happen to be listed into Iran. So they are not only naturally hedged against the currency depreciation, but many of them actually benefit from the depreciation of the Iranian rial.

Maciej Wojtal (00:25:33):
Imagine you’re an exporter, the currency goes down, so dollar goes up by 50%. Your revenues go up by 50%, but your costs remain in rial that is depreciating. So you’re much more competitive. Your margins are increasing. And if your revenues are going up 50%, your earnings are going up much more because of operational leverage. So that’s why we were focusing on we had to change strategy many times. So this is not in line. What Buffet said that just don’t over-complicate your investment strategy in a country like Iran, where the stock market and all the assets are strongly affected by the macroeconomic drivers, such as the FX or the inflation or trade disruptions and so on. Well, you have to have a strong understanding of macro because profits will be more driven by macro in those periods than by the quality of the management of the company, for example.

Maciej Wojtal (00:26:26):
This is what we were doing initially. We were invested in companies that would benefit from the opening up of the country. Then we switched our portfolio to focus completely on companies with the highest sensitivity of earnings to the dollar exchange rate. So initially, these were exporters with the biggest leverage actually, so where every appreciation increase in the rate of the dollar was affecting the earnings the most. So these are the returns quite astonishing over a long period of time while albeit with a higher volatility. Then I would say even more astonishing under a period of strong sanctions, which was during the previous US administration where they proven the resilience, which is also the resilience of a big part of the economy, which is manufacturing expert driven. And especially when you look at the companies that export in the region. So not the big exporters that sell to South Korea, Japan, and so on, because they got affected by sanctions and their volumes drop.

Maciej Wojtal (00:27:26):
But the regional exporters, companies exporting paper to Afghanistan or to Pakistan, or companies exporting food or cement to Iraq, they were not affected by sanctions because their trading in oil and also the regional trade was much more difficult to stop for the US than the big exports out of the country. These are the returns, but it’s also quite very, very interesting how different industries, different types of companies were benefiting from what was going on in Iran. So initially, the exporters were the obvious choice, you speak to the focus on when the currency was depreciating, but what happened next? And we studied 15 years of the Iranian historical data of the index, where we looked at different periods of not only stock price performance, but also of corporate earnings. Maybe one comment here, you have really good data available in Iran, not only on the macro level statistical data, but on the company level.

Maciej Wojtal (00:28:30):
So the reporting is quite strong. The regulatory requirements, reporting requirements are more strict than in Europe, most of the European markets, in my opinion. So this is very helpful. Also, when we want to study the history of the Iranian market and how different industries, different companies were reacting to different regimes, different phases of the cycle, let’s say, we can go back, look at the share prices, which show us, okay, what happened on the market. But then we can also pretty much correlate it against the developments with the financial data to understand, okay, so who was actually benefiting? And then we drill down, dig deeper to try to understand, okay, so what actually happened that caused sales in this particular industry to accelerate the growth, to accelerate in the period, for example, of sanctions? And with exporters, it was pretty obvious, but then these weren’t the biggest beneficiaries. The biggest beneficiaries were actually local producers, domestic producers that were selling in the domestic market.

Maciej Wojtal (00:29:31):
Why? Because their competitors were suddenly gone. They were first of all, priced out of the market after a 70% depreciation of the currency. Even the Chinese companies exporting to Iran were no longer competitive, but also, it was just simply too difficult to export to Iran because of sanctions. So what I said at the beginning, organizing logistics or shipping insurance payments and so on, this was either expensive or just impossible. Local producers, despite the economy not expanding, so economy just going sideways, the oil part of the economy was declining, obviously. So with stagnant economy, those companies suddenly were showing big sales growth because they were gaining market share because the imports collapsed. So import substitution, actually was even a bigger, stronger effect or had a stronger impact on earnings than in the case of exporters. So that’s super interesting and exciting when you look at Iran. Because all this goes back to the depth and the diversity, how well diversified is the local market. And because you have so many industries listed, you can always find something interesting happening somewhere.

Stig Brodersen (00:30:44):
So let’s go back and talk a bit more about the currency. And I can see here back in September 2010, one US dollar worth the same as 10,000 Iranian rial. And then since August 2018, it’s equivalent to around 42,000. Could you talk a bit more about those vertical moves? Has the currency been pegged? How does that play into it?

Maciej Wojtal (00:31:07):
It’s actually more complicated than what you are seeing on the chart at the moment, because you are looking at a chart of the official exchange rate. And to make things more complicated, there are a couple of exchange rates in Iran. There is the official that actually no one uses. The official rate is the rate that only importers of essential goods can use. So when you’re importing food or medical products to Iran, you can go to the Central Bank, show them what you’re buying and ask them to sell you dollars at the 42,000 rate. This is basically a subsidy so that imported essential goods are not too expensive for the population. They are in the process of reforming this because it’s a really bad policy that has many negative unintended consequences, many corruption, but also killing domestic industries. So let me first comment on those different exchange rates.

Maciej Wojtal (00:32:08):
You have the official exchange rate, as I said, no one can trade on this. It’s only for the importers of essential goods. Then you have the NIMA rate. NIMA is the platform where all the biggest exporters and importers are required to buy and sell hard currency. This is where the biggest liquidity is. If petrochemical companies sell or other exporters sell products abroad, and they get paid, then they have to sell their hard currency. Everything that they don’t need for imports on this platform. So this is the biggest liquidity. And over there, $1 is around 250,000 rial. That’s a big gap, right? 42,000 and 250,000. And there is also a bazaar rate or market rate or black market rate. It’s not a black market. It’s also legal, but it’s only available to individuals.

Maciej Wojtal (00:32:59):
So when you are an individual Iranian, you want to buy a couple of $1000, you go to one of the exchange houses or to the Bazaar actually, and you can buy dollars there. And on the Bazaar, $1 is around, right now, probably 280,000 rials. So we have 42,000 on the official rate, but you don’t care about this rate. You cannot use this. You have the NIMA rate 250,000 and you have the market rate around 280,000. Most of the time, the spread between the market rate and the NIMA rate, so the individual, let’s say, and the corporate, the liquid rate is around 10% percent. Sometimes it expands to 20 or 30% when there is some stress when suddenly individuals go and to rush to buy dollars, because there is some usually geopolitical tension. Sometimes it collapses to 0%, but the average spread is around 10% and this functions well. So the government is strong trying to get rid of the official rate because this is basically subsidy, but this subsidy is not working well because it causes corruption.

Maciej Wojtal (00:34:09):
So you can read stories every now and then about some friends of some minister or some other official person who got access to this rate to import iPhone instead of food or pharmaceuticals. It also is just not very wise because if you can import food at this rate, it means that it’s very cheap for the importers. It’s very cheap to buy, for example, Turkish butter or some other food product. And what this means is that there is no incentive to produce it locally, because if you want to produce stuff locally, you have to use local prices. All the local costs, you don’t get any subsidy. And so also the price of the product at which you will be able to sell to be profitable, will also not be subsidized. It will be just a market price and this market price will be always higher than the subsidized price of an important product, in this case, that is where the official rate is used.

Maciej Wojtal (00:35:08):
So that’s why I said that this rate is actually killing domestic industries because I was looking for producers of some essential food product in Iran, for example, butter. And I couldn’t find any. And I realized that now it’s actually cheaper to import it from Turkey because of the government subsidy than to produce it domestically in Iran, despite the lowest wages in the world. So it’s just unwise. They are removing it and plan to replace it with different types of subsidies, like direct cash handouts to the poorest segment of the population, which definitely makes more sense.

Maciej Wojtal (00:35:44):
Now, going back to those different exchange rates in the chart. You saw some pretty drastic moves. But then again, you’re only looking at the official chart where the drastic moves and that 42,000, the real rate is 280,000. So those drastic moves were even stronger. And the currency, as I said, is the asset that is the most sensitive to geopolitical pressure. So whenever you had, for example, over the previous four years, five years remaining sanctions. So sanction being imposed by the previous US administration, it was the currency that was reacting. Also, because of lower oil sales. So I get sanctions affected oil exports. With lower oil sales, Iranian government is running budget deficit that is much higher than it used to be when the oil sales were at two million sales per day exports. So they had to print money basically. They try to raise taxes or maybe collect taxes more efficiently. They’re trying all the good things to make the system work more efficiently, but they’re also printing more money. And this increases inflation, which obviously decreases the real value of rial, so the currency is dropping.

Maciej Wojtal (00:36:56):
Going back to inflation, you asked about the monetary policy. There is no official interest rate set by the Central Bank in Iran. As you know, you have the FED funds rate or interest rates policies in developed countries, they try to control inflation mainly by limiting the interest rates that commercial banks can offer on their deposits or charge on their loans. So they’re targeting directly the rates at the commercial banks, but also they try to intervene on the currency market up to certain level.

Maciej Wojtal (00:37:36):
This is limited by the size of the reserves. Because the majority of the inflation is driven by effects, they’re trying to affect the FX market to stabilize inflation. Not very successful when you’re under sanctions, when you don’t have reserves coming from oil exports. That’s why inflation has been running high since 2019. But it’s important to note that before the sanctions of the previous US administration, inflation in Iran was in single digit. It was around eight, 9%, 10%, let’s say, for a quite a long period of time. And then it moved up to 50% or whatever, because of sanctions. And there is no reason why it shouldn’t go back to where it was, let’s say, around 10%.

Stig Brodersen (00:38:22):
So whenever I hear about an investment opportunity like Iran, the upside itself is really selling itself. And this is a type of investment that’s been on our radar for quite some time. I think it was back in 2017, 2018, we had Raoul Pal, coming on the show and talking about investing in Iran. And he talked about how attractive it was, also how difficult it was to get access in the first place. But because of how many tailwinds you simply get from all the low valuations. And if I can then make a segue into talking about, Warren Buffett, which is an investor we really follow a lot here on the show. He made this 500 million investment in PetroChina back in 2003.

Stig Brodersen (00:39:01):
And at the time, the company was producing 2.5% of the world’s oil. So you have revenue that’s priced in USD. A lot of the cost and all costs, it was in local Chinese currency. It was trading at a very low multiple and the 45% payout ratio. So what Warren Buffett had said afterwards was that the downside risk was just so low. Because of this high payout ratio, I mean, you can only pay dividends out of actual cash. You can’t do it on accounting numbers of whatnot. So he felt that the downside protection was really, really high because he would recoup such a high part of the initial investment just from dividends. And then, of course, you would still have the upside. Do we have any kind of similar scenarios happening in Iran for some of the local companies?

Maciej Wojtal (00:39:46):
This is the most exciting part about Iran. I guess we should have talked about it. After I’ve seen the country, I got interested in the people in the top down like macro view and the potential and so on. Everything looked really great, but the single most important factor that made me go there, quit my job, set up a fund that will invest in Iran and so on, were the valuations. And the valuations, they’re not only cheapest in the liquid world, let’s say. They are like ones in a generation, I think, potentially though. Look, we are buying, for example, fertilizer producers at… Well, last time, we did an estimate. It looks like 3.2 times forward net earnings. By forward I mean next 12 months of a company that is producing fertilizers has access to gas and is just enjoying the situation in Europe where the fertilizer plants are being shut down because of the natural gas crisis and price hikes and not enough supply and so on.

Maciej Wojtal (00:40:46):
The first company that I bought was utility company that was supplying chemical gases and sweet water to petrochemical plants. And it had a monopoly position in the region where it was located. It was valued at four and a half times key paying 20% dividend yield and all their contracts were priced in euros. So it was hedged, again, the currency depreciation. The petrochemical, the fertilizer producer that I mentioned also exports a big part of their production. So they are enjoying strong global prices in US dollars. When you look at the whole market, let’s say you have 600 companies, but we actually get consensus estimates for around 100 top companies. By top companies I mean the biggest and the most covered by local analysts. So when I look at forward P, it’s around 4.8 at the moment for the top 100 companies, which means that you are able to find companies that four times earnings, it’s three times earnings.

Maciej Wojtal (00:41:50):
Now, the average expected dividend yield 12 months from now, again, for those 100 companies is around 12%. The average, you have many companies. For example, we have one pharmaceutical company in our portfolio that is priced at four times earnings, and well, we think it will pay the dividend yield will be around 21%. 21% from a stable pharmaceutical business, nothing to do with any sanctions, easy to buy liquid listed in Iran, those type of opportunities. And this is the reason why the index has been performing so well, despite like the really bad macro, despite the really negative pessimistic scenario that was playing out for Iran over the last decade or 30 years of the index. And we have a cement company, not because we are very bullish on cement. There’s actually oversupply in many parts of Iran, but it’s original product. It’s difficult to export it.

Maciej Wojtal (00:42:51):
But they are located on the border with Iraq and have Iraqi subsidiary and whatever building products you sell in Iraq, everything gets sold at strong prices, and they’re getting dollars for it. And again, it’s between four and five times earnings. And software companies that we have that are available on the market are probably at eight times earnings and they’re growing, obviously, high margins and so on. So the market is very cheap and there are reasons for it. One thing is that interest rates are quite high, they’re at around 20%. So the competition from deposits is high, but still, if you were to make an investment decision and you have an inflationary economy, you can and put your money on a deposit at 20%, or you can put money into companies that pay between 10 and 20 or 15 and 20% dividend yield.

Maciej Wojtal (00:43:43):
And their earnings are actually growing and their hedge against the currency depreciation and inflation. And then, obviously, you would be buying stocks, but the 90% of the trading in Iran is coming from individual investors. So it takes time for them to realize. They usually, always. There was an interesting survey in Iran among individual investors that asked local investors, how do you make investment decisions? So the most popular answer was that they ask a friend, they look for advice on social media and then that it was a random choice. But it’s probably not surprising, but this just shows you, it has good and bad outcomes for other investors. Very good thing about it is that the market is inefficient. So you can find undervalued assets, especially when you look at different types of instruments. Sometimes companies issue share rights. And those rights, because you have to call them for two, three months before they get converted into ordinary shares, then you can sell on the market, no one wants to buy them because it’s a very long time horizon, two to three months for the individual investor.

Maciej Wojtal (00:44:53):
So we can buy them at strong discounts, like 30% discount to the underlying share price, right? So if you have a company, we were buying one of the commodity producers. The company itself was trading at five times earnings and we were buying share rights. That time I think it was 30% discount to the underlying share. So we were effectively buying it less than four to three and a half times earnings. So those type of situations are also possible on top of the already very attractive, very low price market.

Maciej Wojtal (00:45:24):
Another reason is that for low valuations is that there is not enough investment capital in Iran, not only foreign capital, but also local capital. There are many wealthy Iranians, but the traditional asset class for them is real estate. One third of Iranians invest in real estate, cash. There are no mortgages. Just if you have any cash, you put it into a plot or into some land. Then it’s probably gold, then cars, because it’s difficult to imports cars. So used cars is actually an asset class that holds its dollar value. So you can hedge. People hedge the currency exposure to sustain their real spending power by buying cars when the dollar goes up. But stock market is just more complicated.

Stig Brodersen (00:46:10):
So let me ask you, Maciej, we have this investment thesis that as the market is opening up, a lot of the money flows into the country that, that pushes up the equity values to “Intrinsic value.” But is there also a flip side? Is it so that if the country is truly opening up that the Iranian companies will not be able to compete in a free and more global market?

Maciej Wojtal (00:46:35):
Absolutely. There are companies that will suffer from suddenly facing professional competitors. So you already have in Iran on a small scale companies like Nestle, Unilever, some big tobacco companies. So really, really big multinational companies that would like to increase their presence. They cannot right now because countries under sanctions. They already have some operations. They’re allowed to keep them, but they cannot increase the scale of their operations. But they will. I know many companies, I speak to many companies, multinational companies that are present in Iran, they are all thinking about expanding as soon as they’re allowed to. I hear about big companies or even sovereign wealth funds that have a list of big investments that they want to do in Iran. They’re just waiting for the green light from the White House. So it will be happening. And in some of those industries, the local companies will suddenly face a different reality because before, with no foreign competitors, sometimes you see lazy management of a company, but it’s just products are selling themselves.

Maciej Wojtal (00:47:45):
This will not be possible. It’s the same for some exporters where some managements or just the quality of these people, it is just terrible. Some of them are very impressive, but some of them are terrible. And they are still increasing profits every year, thanks to the currency depreciation because it helps them to stay competitive and they will have to improve operations and the quality management in the future. But on the flip side, there are many companies that are just obvious takeover targets. For example, we are looking at one investment holding. This is a thing in Iran, you have investment holdings, banks, for example. Banks love or used to love now the regulator is just actually pushing them to sell non core assets. But they used to love acquiring different assets that had nothing to do with banking. So mines of zinc or some companies. And they’re building those investment holdings that have assets.

Maciej Wojtal (00:48:42):
And very, often, there are multiple layers of investment holdings. So we have a big investment holding that holds another investment holding that holds some assets that are interesting. And for example, we are looking at one investment holding that holds companies that produce cleaning products and personal hygiene products, salt, washing powder, those type of things. And these companies together, they have around 20% of the market share of a market that is 84 million people plus the export markets in the region. And these are brands that have been around for 50 or 60 years. Non-cyclical, strong distribution across the whole market, sometimes in the region as well. The portfolio of different product types and different brands valued at around five times earnings because you have additional discounts if you buy the whole investment holding because the holding itself is listed, but it’s listed below. It’s an AV, because there are some additional costs on the holding levels, many managements, many inefficiencies that you could easily get rid of. So five, six times earnings that you have to pay for the whole thing.

Maciej Wojtal (00:49:51):
You understand that the real earnings that this can produce are twice as high. So you’re actually buying it free time earnings, but the most important thing for a big multinational company would be that you get to acquire very strong brands and distribution network across the whole country for the size of the investment. I mean, the whole market cap would be around $200 million. So it’s nothing. It’s not a serious investment for a big company. And it gives you a great foothold in a big country where good spending power of consumers will be going up. So those are the companies that will obviously benefit. I’m sure they will be taken over. So you have different companies. Some of them will, obviously, face competition, but some of them will be taken over.

Maciej Wojtal (00:50:36):
But many, many other companies, and this is the main point of the investment thesis that this country will start growing fast. It has everything it needs in terms of to realize this potential, quality people, companies that have already gained scale big enough to be able to operate under sanctions because of the big domestic market. The country that missed everything good that happened in emerging markets over the last three decades. So they will experience all of this, inflow of capital, interest rates going down, access to financing, transaction costs going massively down. This is the main point of the investment thesis. And then on top of that, you know because you can actually Google interviews with one of the biggest passive asset managers in the world where they say that Iran is probably the most exciting market for the next decade. These are usually American institutions.

Maciej Wojtal (00:51:33):
So they cannot invest right now and they’ll have to wait until they can invest a bit longer. What we can do and what all the non-US investors can do is actually front run those guys and take advantage of these low valuations. And even if you have to wait for the big opening up when finally the US investors are allowed to invest as well. In the meantime, you see that those companies are growing and the growth should only accelerate with the opening of the market. This is the main thing that I find the most attractive in Iran.

Stig Brodersen (00:52:04):
We used to think of the major players in geopolitics, China, US, and Europe. However, for Iran, we have many more players than that if you really dig into the political situation. So could I ask you to elaborate a bit more on that? And because we also have new President now, Ebrahim Raisi, in Iran who are now succeeding the former president, Hassan Rouhani. So what implication will that have for our investment thesis as investors?

Maciej Wojtal (00:52:33):
So new president versus old president, no change, absolutely no change. There was change in rhetoric because the new guys are calling themselves conservatives and the previous ones were calling themselves reformers. But to be honest, it’s the same establishment. It’s not democracy, it’s the same establishment with maybe different factions, but the main political decisions are still being made by the Supreme leader and his council. The government is more about executing those ideas, not about making its own policies. So no change or actually from what I see in terms of economic policies, what the new government is talking about is actually what the previous government should be talking about. The big reform to subsidies, for example. This is very important and should have happened a long time ago. And it’s actually, I think, it will happen soon and it will be the Conservative government that will be paradoxically implementing this. So in terms of domestic politics, no real change. Specifically and importantly, no change in terms of the plan to sign a new nuclear deal with the West and change these relations.

Maciej Wojtal (00:53:46):
Now, the region is fascinating. You have the big superpower, which is the US, that is actually removing itself from the region. Afghanistan is obvious example. But US is removing itself from the region, and it’s also, I guess, obvious, they no longer need to import that much energy as they used to. So the US is self-sufficient. I mean, they still need to import because they produce the stuff that they can export, but they need to import some other oil products. But on a net basis in aggregate numbers, they are self-sufficient. So they don’t care that much anymore, brutally speaking. And it’s probably would be more and more difficult politically to justify sending young American soldiers somewhere to the region that is not actually that important for the security of the country, even energy security anymore.

Maciej Wojtal (00:54:39):
However, who should care is Europe and China because these are big countries, big regions that the need to secure long term supplies of energy. China understands this, Europe not really. I think they are beginning to understand right now. So China understands and they are speaking to everyone in the Middle East, Iran, Saudi Arabia, Qatar, to secure long term contracts for oil and natural gas. And this is super important for the Chinese economy. Also, in case of Iran, China has a strong negotiating power because this is the only country that keeps on importing Iranian oil, despite US sanctions. They’re not doing this directly, but indirectly through Malaysia or different tankers, whatever. And I think they also started paying in different currencies than the US Dollar. China would love to pay in the Chinese yuan because then they would no longer be relying so much on the US Dollar. So it’s very important for the security of the Chinese economy.

Maciej Wojtal (00:55:44):
For Iran, getting yuan is not great because there is nothing you can do with yuans, but they can buy Chinese products with those yuans. And so they’re definitely doing this in many different currencies. Russia is important. They have big presence in Syria where also Iran had a big presence in Syria. They were both cooperating with Hassan. So they were also cooperating with the each other. With Russia, also helping Iran with some exports where Russia basically can buy Iranian oil and use Iranian oil and sell more of its own Russian oil to the global markets. But this seems to be more like convenient, the corporation because it’s convenient. So out of convenience, marriage out of convenience than a strong, long term partnership.

Maciej Wojtal (00:56:32):
With China, it makes much more sense because their interests are aligned. They have signed a long term, 25 year corporation partnership program, where China said that they would invest around $400 billion over 25 years. But much of this front loaded $400 billion. Iran’s GDP is around $200 billion. Well, depending which exchange rate we use and from which moment. But let’s say it’s around $200 billion. So it’s twice, the size of this investment is twice as much as Iran’s GDP. So it would be more than Marshall Plan for Europe after war or more than EU funds for the Eastern European countries that access the EU 2004. So it’s a big, big injection of investment into the Iranian economy and it’s going where it should be, which is the infrastructure. Iran needs infrastructure spending. And because the level of investment for now is so low, everything you invest is very productive. It’s like Chinese investing in your own infrastructure 20 years ago. So it makes economic sense.

Maciej Wojtal (00:57:43):
And the Chinese want to spend mainly on oil and gas production because then Chinese are getting paid in the discounts in oil, and like big discounts, 30% discounts in oil price that they will import over the next two, three decades from Iran. For Iran, it’s a great deal. I mean, Chinese will come and help build the oil production infrastructure, ports, airports, highways, all the vital infrastructure and Iran gets to sell oil at 30% discount. Otherwise, this oil would be stuck on their ground. I mean, so it’s such a really, really good trade for Iran, but also for China. Then China also gets closer to Iran, which is on their Belt and Road Initiative as one of the most important countries. I mean, it’s through which all the freight, all those trains will be going to Europe. Already, I think three years ago, they opened a train connection between Tehran and Cheyenne, I think, in China, which cuts significantly the time of shipping via sea routes. So China, absolutely, I think the most important player there, but there are also regional relations.

Stig Brodersen (00:58:54):
Maciej, we covered a lot of ground here during this interview. We talked about the stock market, a lot about the political situation and everything in between. I’ve learned so much from this interview and I’m sure our listeners feel the same way. Where can the audience learn more about you, but also about Amtelon Capital?

Maciej Wojtal (00:59:11):
Yeah. So if you would like to chat about Iran, talk about investing in Iran, we obviously know a lot about this. We’ve been focused on Iran since late 2016. We launched our first fund in 2017. So please go to our website and just send us an email and I’m happy to reply. I’m also on Twitter where I try to publish from time to time some interesting updates. But definitely, get in touch via email. And I’m happy to put you on our distribution list. We do quarterly updates that we send out to everyone who is interested. So please, do get in touch.

Stig Brodersen (00:59:45):
Fantastic. And we’ll make sure to link to all of that in the show notes. Maciej, thank you so much for the time you spent with us here today. It’s been fantastic.

Maciej Wojtal (00:59:54):
Great. Thank you so much, Stig, for having me. It was really good fun. Thank you.

Stig Brodersen (00:59:58):
All right, guys, that was all that we have for this week’s episode of The Investor’s Podcast. If you like this episode, make sure to subscribe on your favorite podcast app. Or if you’re watching on YouTube, make sure to hit that subscribe button just below the video. All right. That’s all we had and we’ll see each other again next week.

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