Kings of the Wild Frontier

15.03.2016 • Emerging Markets, Politics and War

From the Price of Everything (Independent) – It has a young, highly educated population. 60% of its people are under the age of 35. It has a literacy rate of over 85%. Almost a quarter of a million new engineers graduate from its universities every year. And its stock market trades on a price / earnings multiple of just 5.5 times, with a dividend yield of 13%. Welcome to Iran.

Is this one of the investment world’s big opportunities, asks Merryn Somerset-Webb in her FT column this weekend ? It very well might be. The question for foreign investors is whether those attractive valuations offer sufficient compensation for the clear geo-political and resource-related risks that come with investing today in the Middle East. Nobody knows the answer to that question. But purely from a valuation perspective, Iran certainly looks interesting, albeit with the inevitable caveats that come with frontier market investing. And not just frontier investing.

It is a characteristic of true value investing that any manager genuinely practising it encounters scepticism or outright hostility on the basis of what often appears to be either a contrarian streak or outright madness. Although there is a growing body of statistical evidence that value investing is one of the most successful long term investment strategies (last week we cited James O’Shaughnessy’s 52 year study from the US stock market, which saw a $10,000 portfolio of 50 stocks with the lowest price / book ratios, for example, compound to over $22 million), it remains on the fringes of acceptable investment practice, because it’s emotionally difficult to pursue – both for investment manager and investing client.

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