The Tehran Stock Exchange Index rallied by over 35% in the three months following the implementation of the nuclear deal in January and over $3bn worth of foreign direct investment (FDI) deals were announced in the same period. That was as a result of knee-jerk optimism and the completion of deals held up until the implementation of the  Joint Comprehensive Plan of Action (JCPOA). But since the start of Iran’s new financial year, in April, the market has remained range bound, reflecting investor uncertainty over what to expect next.

On the FDI front there have been a couple of big deals, such as the Total-led consortium’s $4.8bn agreement to develop the huge South Pars gas field. In reality, we now know that this is not a legally binding agreement but a “Heads of Agreement” contract, ie. a statement of intent.

And that really sums up where most investors are with regard to Iran right now; attracted by the potential; keen not to miss out and lose ground to competitors; but worried that it may still all go wrong. In such a situation the prudent stance is exactly what we are seeing today, as most portfolio and strategic investors wait to see how the balance between these factors shifts.

For investors there are four key issues to watch: geopolitics and the future of US sanctions; the willingness of non-US investors to look past the US sanctions; the pace of reforms in Iran and the position of the reformers; and those three issues are set against the backdrop of a strong pickup in economic growth led primarily by the very paced growth in consumer and service sectors. How the balance between these hopeful and negative factors plays out over the next six months will result in either a resumption of the positive momentum or seriously damage the dream.

Over the short term investors will pay most attention to what is said by US president elect Donald Trump and the senior members of his administration about Iran. Specifically whether there is any substance to the threat of to roll back the nuclear deal or whether there will be a more pragmatic effort to engage with Tehran. Even if the threat of a roll-back is deemed small, there remains the vexing question of the existing US sanctions. These block US investors from directly engaging with Iran and also bloc the use of the US currency and financial system in any deal involving Iran. Moreover, the fact that these US sanctions are in place is regularly cited as the major reason why, for example, the big European banks are reluctant to open up to Iran.

The US Office of Foreign Assets Control (OFAC), the agency charged with policing US sanctions and arbitrating any disputes, has said it is not playing “gotcha” with investors engaged with Iran, but equally it intends being very firm in implementation of the rules. However, in September it did allow both Boeing and Airbus to proceed with billion-dollar deals to sell aircraft to Iran. That was taken as a very optimistic signal that a way can be found for US investors, even with the existing tough sanctions regime, to access the Iranian market. Investors are now waiting to see whether that approval was a one-off or whether the new administration will initiate steps to make it easier for US corporates to work within the existing system, if not actually start the process of reducing the sanctions.

One continuing concern is that both houses of Congress are now controlled by the Republican Party, which has been very opposed to the nuclear deal and would prefer to further isolate the country. President Trump will have to barter with Congress to get his more important policies and projects approved. The risk for Iran is that it may end being sacrificed in order to get support for Trump’s bigger priorities.

Small is still beautiful

On a more optimistic note, while the big deals are few and conditional – eg. the Total consortium gas deal, and the big EU banks stay sidelined – there continues to be a steady flow of smaller deals in the manufacturing, consumer and services sectors. Over 60 separate deals have been put in place since the start of 2016.

One issue that will boost optimism and encourage the bigger banks to take a step closer to Iran is the banking reform programme which is planned to be put in place early in the new financial year. If the government is able to make the changes proposed in the draft legislation, then both transparency of transactions and ownership will improve, and the banks will be able to more effectively deal with bad loans and collateral conversion. This would also go a long way toward getting Iran’s status in the Financial Action Task Force (FATF) ranking permanently reduced from “High-Risk”.

Another domestic concern for investors is whether reform-minded President Hassan Rouhani will be re-elected in May. Although this does seem likely, there are lingering concerns that a more aggressive stance by the US administration or Congress could undermine his position and allow a hardline candidate take over. The Rouhani-led government secured support for the nuclear deal with the West on the basis that it would lead to a removal of sanctions, increased investment to boost the economy and a new era of prosperity for the country. He has already come under attack for giving away “too much for too little”.

The one area of good news is in the economy. For the April-June period, GDP expanded by 4.4% y/y and points to full fiscal year growth not far off that rate. That is a big improvement on the 1.0% growth recorded for 2015/16. The Central Bank of Iran has had notable success in bringing inflation down and that has allowed it to start cutting interest rates. But it has been in the manufacturing and consumer sectors where the strongest growth has been recorded and where the best opportunities for both strategic and portfolio investors lie in the years ahead.

Investing in Iran is a little bit like being offered a lot of money to spend one night in a spooky house. The money is real and you know that it will probably be alright through the night. But as the doors and floor boards creak and your imagination sees shapes in the shadows the perception of risk becomes very real. Those who hold their nerve will be rewarded. But in the meantime, any possibility for peaceful sleep is out of the question.

Chris Weafer is a founding partner of Macro-Advisory, which helps investors cut though the noise & focus on underlying trends, real political risks, & opportunities in Russia/CIS, Eurasia Union, & Mongolia. Follow him on @ChrisWeafer.