Courtesy of The Financial Times, a look at the Tehran Stock Exchange:

The best performing stock market in the world in 2013 was up 130 per cent last year*. The country it serves has a population of nearly 80m, some 40 per cent of whom are under the age of 24. It has one of the world’s highest literacy rates and is also home to the world’s fourth largest proven crude oil reserves. Which market is this? The Tehran Stock Exchange (TSE), of course.

For frontier market investors, Iran remains the Holy Grail. Charles Robertson, Global Chief Economist at Renaissance Capital, believes that following the opening of the Saudi Arabian market, “Iran is the world’s last major market to open up” and could potentially be accessible in the next 6-18 months.

First established in the 1960s, the TSE now has 320 listed companies, with an aggregate market capitalisation of $130bn. There is also a smaller over-the-counter market, the Fara bourse, which lists 180 companies, with an aggregate market capitalisation of $40bn. Combined across both markets, $100m trades are completed on a daily basis. At its peak last year, trading liquidity reached $250m per day.

The TSE currently trades at price-to-earnings multiple of 6 times, with a 17 per cent dividend yield. By comparison, the MSCI Frontier Markets index trades at price-to-earnings multiple of 12.4 times, with a 3.7 per cent dividend yield.

The modern origins of today’s TSE can be traced to 2006 when Iran’s governing bodies re-interpreted its constitution and introduced a privatization law which was implemented by then-President Mahmoud Ahmadinejad. As Ramin Rabii, the CEO of Turquoise Partners, a brokerage and investment firm, explains “privatisation was a game changer. Of the top 30 companies on the TSE, most have come through privatisation.”

Established in better days, when there were no EU or UN sanctions, today Turquoise Partners is the only vehicle in Iran for foreign investors to access the market. Contrary to popular perception, investors from the EU and elsewhere (with the exception of America), are permitted to invest in Iran. There are certain companies and sectors that are prohibited given the sanctions regime, but a large portion of the market remains investible in theory. In practice, however, given the current sanctions regime, foreign investors find it difficult to invest directly or indirectly, since banks cannot transfer funds, and there are no custodian banks.

As such, foreign investors comprise only 0.5 per cent of the TSE. By comparison, foreigners own 60 per cent of Turkish equities.

The challenges to investing in the Iranian market, ironically, have also created significant opportunities for investors. For seasoned investors, Iran is remarkably similar to Turkey. Iran has a comparable economic, demographic, and cultural profile, albeit with one of the world’s largest hydrocarbon reserves. Robertson adds that although the official per capita GDP is near $5,600, in his experience it feels closer to $8,000 to $10,000. A significant global advantage for Iran, if given access to global markets, is its manufacturing base.

Robertson explains that Iran also has a cost advantage relative to other developing economies in that, “Iran’s wage costs are lower than Vietnam’s.” Moreover, literacy among young adults in Iran is among the world’s highest with an estimated 97 per cent literacy rate, and Iran excels in science and maths education. Earlier this month, the top prize in mathematics – the Fields medal – was awarded to its first female recipient – an Iranian who earned her bachelors degree at Sharif University in Tehran. This unique combination of low wages and high education render Iran an exception within emerging and frontier markets.

The largest single challenge to foreign investors seeking to deploy capital in Iran remains the sanctions regime which has long hobbled Iran’s economy. Iranians, however, remain optimistic that eventually sanctions will be eased. When EU, American, and Iranian negotiators made progress this year, increasing the likelihood of an easing in sanctions, Iran’s stock market index more than doubled. Following the latest round of negotiations on American sanctions, Iran can now officially export its oil to six nations, including: China, India, Japan, South Korea, Taiwan, and Turkey. All other nations are still barred, and even the permitted six are not allowed to increase their purchases.

Despite the TSE’s performance last year, Iran’s economy continues to face serious hurdles, most of which related to the sanctions. Foremost among them are unemployment and inflation. The Central Bank of Iran, estimates that unemployment exceeds 10 per cent. Meanwhile, inflation has steadily fallen from 30 per cent earlier this year, but still hovers around 15 per cent. Hamstrung by sanctions, the International Monetary Fund (IMF) estimates Iran’s GDP will grow by a meager 2.4 per cent in 2015, although by comparison GDP shrunk by 6.6 per cent in the 2012 – 2013 fiscal year as a result of sanctions. Another potential area of future weakness, warns Robertson, is the country’s housing sector, which has seen over investment.

The dire reality of Iran’s economy is perhaps made clear in examining Iran’s exports. More than 80 per cent of the nation’s exports are petrol and petrochemical products. The second and third largest exports are fruit and nuts, and carpets. Despite these challenges, when looked at holistically, it does appear that the economy, while still fragile, is trending towards improvement. If given access to global markets, with its wide manufacturing and services base, Iran’s economy could boom.

Iran’s latest round of negotiations with the so-called P5+1 group – the US, Russia, China, UK, France and Germany – are set to resume in November of this year. Iranians are keen to note that their choice in President Hassan Rouhani in the 2013 election reflects their desire to normalise relations with their Western counterparts. Of the six presidential candidates in the election, Rouhani was the only former nuclear negotiator to reach a deal with his Western counterparts. In the end, he received an overwhelming mandate by winning 51 per cent of the vote. The next closest candidate received only 16 per cent.

Given the excitement about the potential opening of Iran, Rabii mentions that over the past few months he has gone from receiving one email every three months from foreign institutional investors, to five emails a week. This is further reflected in the 65 delegations that he has met since January of this year. Robertson, who visited Iran in March of this year and is organising another informational trip for clients this year, adds that investors are “wildly excited” at the prospect to invest in Iran. They, and others, will have to continue waiting until November of this year at the earliest.

*Note: This excludes Venezuela whose stock market was up 430 per cent in local currency, but only 75 per cent in US dollar terms, given its currency devaluation.