Iran’s Tehran Stock Exchange market capitalisation could increase by over 400 per cent to $500bn in the five years after sanctions are lifted, according to projections by local Turquoise Partners.

The TSE currently has a market capitalisation of $98bn, the second smallest compared to GDP, at 25 per cent, in the Middle East, according to Dubai-based Mubasher Trade. This indicates that there is ample room for expansion, given that Tehran has one of the most diversified economies in the region.

Turquoise Partners took the experience of Turkey, as foreign investment flooded in between 2002 and 2007, as a model. The Borsa Istanbul index rose 580 per cent over the period as foreign ownership rose from negligible levels to around 40 per cent.

“Turquoise Partners was contacted by over 100 serious investors in the week after the nuclear deal,” says Ali Mashayekhi, chief financial officer at the Iranian asset management firm. “They were mainly individual investors, but also emerging market funds and global banks doing fact-finding.”

Only around $1m of foreign investment is said to have flowed into the market so far.

The 10.4 per cent rise in the main index (Tepix) in the month leading up to the nuclear deal was mainly driven by renewed confidence from domestic investors. However, in the weeks since the announcement sentiment has softened, with a 3.2 per cent fall between 14 and 26 July.

Once the barrier of sanctions is lifted, the flow of foreign investment could increase to $100bn over five years, according to Turquoise Partners. Oil and gas, petrochemicals, consumer goods and the financial and insurance sectors are expected to be the first targets.

Concerns remain over accounting standards, transparency and corruption. “Iran is a risky, difficult market for investment but you can’t compare it to other frontier markets, which are underdeveloped,” says Mashayekhi. “In comparison, Iran has quite a good legal infrastructure, so the risks are economic and commercial, not legal.”

This figure would increase further if US-based MSCI began looking at including Iran on its frontier or emerging market indices. Despite recent efforts to upgrade the TSE, including the installation of an international-standard trading platform, some reforms will undoubtedly be needed for MSCI approval. MSCI is yet to make a statement on the topic.

The TSE total return index consistently outperforms the MSCI emerging and frontier market indices and is in the mid-range for emerging markets capitalisation.

It has a price to earnings ratio (PER) of 5.7 times, which significantly more attractive than the emerging markets PER of 12.3x, according to Mubasher Trade.

Foreign investors can own 20 per cent of the stock exchange, while the individual foreign investor limit on a single company is 10 per cent.