By Arthur Snell, Managing Director, PGI Intelligence
- Moderate President Hassan Rouhani is the favourite to win the election on 19 May, although recent criticism on his economic record and foreign policy has increased uncertainty around the outcome.
- Irrespective of the winner, Iran’s investment climate will continue to experience uncertainty. If Rouhani wins, conservatives in rival political and religious institutions will continue to try and derail his reform agenda while an electoral defeat for the incumbent would empower hardliners in the security establishment to reverse efforts to make the country more attractive for external investors.
- Remaining US sanctions will also continue to limit foreign investment, especially with relations between Washington and Tehran expected to worsen under President Trump.
Rouhani vulnerable but remains favourite
Although accurate polling remains problematic in Iran, recent surveys have consistently indicated Rouhani remains vulnerable on the economy and the landmark 2015 nuclear deal, or Joint Comprehensive Program of Action (JPCOA). The nuclear deal is inextricably linked to Rouhani, and, according to a poll released in January by the Centre for International and Security Studies at Maryland (CISSM), nearly 73 percent of Iranians agreed that economic conditions had failed to improve after the deal and 51 percent felt the situation was deteriorating. A survey released by Iran Poll in April found similar levels of discontent over the economy and the nuclear deal, with more than 40 percent saying Rouhani was “somewhat likely” to lose the election and a further 14 percent suggesting his defeat was “very likely.”
However, despite increased public scrutiny and criticism, historical precedent and disunity among Rouhani’s rivals suggests that it is still likely he will secure a second term. Since Khamenei’s presidency in 1981, all Iranian presidents have successfully secured two terms in office, and notwithstanding recent pressures, Rouhani appears to remain among the most popular figures in the country. In the 2013 presidential election, conservatives failed to unite around a single candidate, and a similar situation may again bolster Rouhani’s electoral prospects. Jamna has struggled to agree on nominees and a rival principlist faction, the Steadfastness Front, has reiterated its opposition to the conservative umbrella group. In a major challenge to the Supreme Leader, former president Mahmoud Ahmadinejad registered for the race on 12 April after Khamenei had explicitly advised him not to do so months earlier. Ahmadinejad’s entrance could be a tactical move to pressure the Guardian Council, which must approve all candidates, from disqualifying his former vice president Hamid Baghaei, who is reportedly under investigation over corruption. Barring both Baghaei and Ahmadinejad could subject authorities to criticism that they are marginalising their supporters, and separately serves as a further indication of disunity within the conservative camp.
The brief campaign season and lack of clarity around presidential challengers only increases the level of uncertainty around the vote. More than 1,600 people have registered to run in the 19 May election and the supervisory Guardian Council is expected to publish a final list of approved candidates on 24 April. Campaigning will commence three days later and continue until 17 May. Symbolising the uncertainty, Rouhani’s first Vice President EshaqJahangiri has registered to run in the unlikely event that the incumbent himself is disqualified.
Investors challenges irrespective of the outcome
Rouhani’s failure to secure a second term would derail the president’s campaign to reduce the political and economic influence of the IRGC. Rouhani has sought to implement reforms, including modernising Iran’s financial and banking system, to attract more foreign investment and provide greater confidence to investors. Should he lose, the already powerful and conservative military and security establishment could see its influence grow, and Iran may embrace insular and protectionist policies designed to minimise its vulnerability to external events.
Even under the most likely scenario, in which Rouhani remains in office for another four years, investors will continue to face complex political and economic conditions. Conservatives in parliament, the security services, media and other powerful institutions will continue to challenge Rouhani amid long-standing factional competition for influence. Underscoring the consequences of this political manoeuvring, in March, Rouhani accused the judiciary of impeding efforts to attract investment, citing the arrest of an unnamed investor. The president will retain only limited powers to push back against efforts by the courts and security services to protect their own interests by discouraging investors, also evidenced by the repeated arrests of dual Iranian nationals in recent months.
Rouhani will also continue to face resistance to the implementation of necessary economic reforms. In June 2016, the Financial Action Task Force (FATF), an intergovernmental anti-money laundering body, agreed to suspend some restrictions on Iran while the country implemented reforms to address deficiencies in its financial and banking system that serve to deter Western financial institutions. Engagement with the FATF has however triggered heavy criticism from conservatives, including in parliament, who argue working with the body could damage national security and cut off Iranian entities, including those affiliated with the IRGC, from the financial system. The inclusion of IRGC-affiliated entities on a shortlist of Iranian businesses approved for partnerships with foreign oil companies is also indicative of the concessions Rouhani will be forced to make to other powerful factions that could ultimately weaken his administration’s outreach to investors.
Sanctions risk and hostile US relations
Uncertainty around sanctions and Iran’s foreign relations will remain a major challenge for the investment climate. The IMF noted in a February report that although Iran had made an “impressive” economic recovery in the past year, anxiety over the nuclear deal and the country’s foreign relations, especially with the US, had created “renewed uncertainty” that threatened the “anticipated recovery”. In November 2016 France’s Total became the first major Western investor in Iran with a USD 2 bn deal for the giant South Pars gas field. However, to avoid US sanctions and minimise exposure to Iran’s financial system, Total said it would use its own euro-denominated cash for the project and receive payment in the form of condensates that it would sell on international markets. Total also appointed a full-time official to monitor sanctions compliance and said that a final decision on the project was dependent on an extension of US waivers of sanctions on Iran. The renewal of the waivers is due to take place in mid-2017, though in April Secretary of State Rex Tillerson announced a planned review whether lifting sanctions on Iran was in US interests despite acknowledging Iran was complying with the nuclear deal.
The increasingly hostile international climate facing Iran since late 2016 is likely to impact the country’s investment prospects. The presidency of Donald Trump has the potential to result in a significant escalation of already heightened tensions between Iran and its rivals. Trump has previously stated his opposition to the nuclear deal and key advisors, including Defence Secretary James Mattis, have urged a tougher stance on Iran. It is unlikely Trump will unilaterally withdraw from the 2015 nuclear agreement JCPOA given the legal, diplomatic and political fallout that would follow. However, his administration could seriously undermine the nuclear deal by pressuring Western companies not to do business in Iran, withholding official compliance guidance around the enforcement of Iran-related sanctions, or creating uncertainty around sanctions waivers.
Washington could increase tensions further by imposing additional unilateral sanctions, as it did in February in response to a ballistic missile test. Both the administration and US Congress are considering designating the IRGC as a Foreign Terrorist Organisation, a provocative move that would increase the complexity of doing business in Iran given the organisation’s vast economic interests. Such a decision would likely elicit a hostile response from the IRGC or its proxies, including possibly Shi’a militias in Iraq who could threaten US soldiers in the country. Trump has also said his administration will step up cooperation with Israel and Saudi Arabia, Iran’s primary rivals in the region, including against Iran-backed Houthi rebels in Yemen.
There is also a growing threat of a direct confrontation between the US and Iran, or Iran-backed forces, in maritime flashpoints in Strait of Hormuz and Bab el-Mandeb strait. In January 2016, Iranian forces captured 10 US sailors, and it took the intervention of then US secretary of state John Kerry, and his Iranian counterpart Mohammad JavadZarif – two diplomats who forged a working relationship during the nuclear talks – to secure their release hours later. However, the change in the US administration is likely to complicate diplomatic efforts to prevent or contain the escalation of any future crises in proxy battlefields such as Iraq or disputes over implementation of the nuclear deal.
By Arthur Snell, Managing Director, PGI Intelligence. Arthur is a former intelligence officer and diplomat. Operationally he has served in most of the world’s troubled and conflicted areas including Iraq, Afghanistan and Yemen, as well as Nigeria and Zimbabwe. From 2011 – 2014 he was Britain’s High Commissioner to the Republic of Trinidad and Tobago, based in Port of Spain. Since 2014 he has worked in the business intelligence and risk management industry and has wide experience supporting major companies and national governments on managing their policy, regulatory and security risks.
Not company earnings, not data but vaccines now steering investor sentiment
By Marc Jones and Dhara Ranasinghe
LONDON (Reuters) – Forget economic data releases and corporate trading statements — vaccine rollout progress is what fund managers and analysts are watching to gauge which markets may recover quickest from the COVID-19 devastation and to guide their investment decisions.
Consensus is for world economic growth to rebound this year above 5%, while Refinitiv I/B/E/S forecasts that 2021 earnings will expand 38% and 21% in Europe and the United States respectively.
Yet those projections and investment themes hinge almost entirely on how quickly inoculation campaigns progress; new COVID-19 strains and fresh lockdown extensions make official data releases and company profit-loss statements hopelessly out of date for anyone who uses them to guide investment decisions.
“The vaccine race remains the major wild card here. It will shape the outlook and perceptions of global growth leadership in 2021,” said Mark McCormick, head of currency strategy at TD Securities.
“While vaccines could reinforce a more synchronized recovery in the second half (2021), the early numbers reinforce the shifting fundamental between the United States, euro zone and others.”
The question is which country will be first to vaccinate 60%-70% of its population — the threshold generally seen as conferring herd immunity, where factories, bars and hotels can safely reopen. Delays could necessitate more stimulus from governments and central banks.
Patchy vaccine progress has forced some to push back initial estimates of when herd immunity could be reached. Deutsche Bank says late autumn is now more realistic than summer, though it expects the northern hemisphere spring to be a turning point, with 20%-25% of people vaccinated and restrictions slowly being lifted.
But race winners are already becoming evident, above all Israel, where a speedy immunisation campaign has brought a torrent of investment into its markets and pushed the shekel to quarter-century highs.
(Graphic: Vaccinations per 100 people by country, https://fingfx.thomsonreuters.com/gfx/mkt/azgvolalapd/Pasted%20image%201611247476583.png)
SHOT IN THE ARM
Others such as South Africa and Brazil, slower to get off the ground, have been punished by markets.
Britain’s pound meanwhile is at eight-month highs versus the euro which analysts attribute partly to better vaccination prospects; about 5 million people have had their first shot with numbers doubling in the past week.
Shamik Dhar, chief economist at BNY Mellon Investment Management expects double-digit GDP bouncebacks in Britain and the United States but noted sluggish euro zone progress.
“It is harder in the euro zone, the outlook is a bit more cloudy there as it looks like it will take longer to get herd immunity (due to slower vaccine programmes),” he added.
The euro bloc currently lags the likes of Britain and Israel in terms of per capita coverage, leading Germany to extend a hard lockdown until Feb. 14, while France and Netherlands are moving to impose night-time curfews.
Jack Allen-Reynolds, senior European economist at Capital Economics, said the slow vaccine progress and lockdowns had led him to revise down his euro zone 2021 GDP forecasts by a whole percentage point to 4%.
“We assume GDP gets back to pre-pandemic levels around 2022…the general story is that we think the euro zone will recover more slowly than US and UK.”
The United States, which started vaccinating its population last month, is also ahead of most other major economies with its vaccination rollout running at a rate of about 5 per 100.
Deutsche said at current rates 70 million Americans would have been immunised around April, the threshold for protecting the most vulnerable.
Some such as Eric Baurmeister, head of emerging markets fixed income at Morgan Stanley Investment Management, highlight risks to the vaccine trade, noting that markets appear to have more or less priced normality being restored, leaving room for disappointment.
Broadly though the view is that eventually consumers will channel pent-up savings into travel, shopping and entertainment, against a backdrop of abundant stimulus. In the meantime, investors are just trying to capture market moves when lockdowns are eased, said Hans Peterson global head of asset allocation at SEB Investment Management.
“All (market) moves depend now on the lower pace of infections,” Peterson said. “If that reverts, we have to go back to investing in the FAANGS (U.S. tech stocks) for good or for bad.”
(GRAPHIC: Renewed surge in COVID-19 across Europe – https://fingfx.thomsonreuters.com/gfx/mkt/xegvbejqwpq/COVID2101.PNG)
(Reporting by Dhara Ranasinghe and Marc Jones; Additional reporting by Karin Strohecker; Writing by Sujata Rao; Editing by Hugh Lawson)
BlackRock to add bitcoin as eligible investment to two funds
By David Randall
(Reuters) – BlackRock Inc, the world’s largest asset manager, is adding bitcoin futures as an eligible investment to two funds, a company filing showed.
The company said it could use bitcoin derivatives for its funds BlackRock Strategic Income Opportunities and BlackRock Global Allocation Fund Inc.
The funds will invest only in cash-settled bitcoin futures traded on commodity exchanges registered with the Commodity Futures Trading Commission, the company said in a filing to the Securities and Exchange Commission on Wednesday.
A BlackRock representative declined to comment beyond the filings when contacted by Reuters.
Earlier this month, Bitcoin, the world’s most popular cryptocurrency, hit a record high of $40,000, rallying more than 900% from a low in March and having only just breached $20,000 in mid-December.
Bitcoin tumbled 10.6% in midday U.S. trading Thursday.
Other U.S.-based asset managers will likely follow BlackRock’s lead and add exposure to bitcoin in some form to their go-anywhere or macro strategies as the cryptocurrency market becomes more liquid and developed, said Todd Rosenbluth, director of mutual fund research at CFRA.
“It’s easy to see how strong the performance has been of late and look at a historical asset allocation strategy that would have included a slice of crypto and how returns would have been enhanced as a result,” he said. “Large institutional investors are going to be able to tap into the futures market in a way that a retail investor could not do.”
There is currently no U.S.-based exchange-traded fund that owns bitcoin, limiting the ability of most fund managers to own the cryptocurrency in their portfolios.
BlackRock Chief Executive Officer Larry Fink had said at the Council of Foreign Relations in December that bitcoin is seeing giant moves every day and could possibly evolve into a global market. (https://bit.ly/2XXFHrB)
(Reporting by David Randall; Additional reporting by Radhika Anilkumar and Bhargav Acharya in Bengaluru; Editing by Arun Koyyur and Lisa Shumaker)
Bitcoin slumps 10% as pullback from record continues
LONDON (Reuters) – Bitcoin slumped 10% on Thursday to a 10-day low of $31,977 as the world’s most popular cryptocurrency continued to retreat from the $42,000 record high hit on Jan. 8.
The pullback came amid growing concerns that bitcoin is one of a number of financial bubbles threatening the overall stability of global markets.
Fears that U.S. President Joe Biden’s administration could attempt to regulate cryptocurrencies have also weighed, traders said.
(Reporting by Julien Ponthus; editing by Tom Wilson)
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