A leap by Tehran Stock Exchange in the past four weeks contrasts with gloom in many bourses around the world and hints at Iran's investment potential as its economy, long isolated by sanctions, rejoins the global trading system.
The TEDPIX index has soared 18.3% since Jan. 16, when the sanctions were lifted after an international deal on Iran's nuclear program. Average daily trading turnover has tripled from last year to around $150 million, according to Reuters.
The economy is still struggling: growth is close to zero, the official jobless rate exceeds 10% and many banks face mountains of bad debt.
As a result, some commentators are warning that the notoriously volatile market may not hold on to its gains.
But many investors are betting that by restoring Iran's links with the rest of the world and attracting foreign capital and technology, the end of sanctions will trigger a long-term economic boom.
"The actual benefits of the lifting of sanctions will take six to 12 months to start to feed into companies' financials," said Payam Malayeri, head of asset management at Griffon Capital, a Tehran-based firm which last month launched an offshore equity fund focused on Iran.
"Investors are discounting that now they are looking ahead to corporate earnings growth in 2017 and 2018."
Some economists think Iran's gross domestic product could grow 5-6% annually in the next several years.
That would boost corporate earnings 15-25% a year, Malayeri estimated. Also, dividend yields are high at around 12%.
So far, auto stocks have led the rally because of prospects for tie-ups with foreign firms. Iran Khodro, which announced a 50/50 venture to build cars with Peugeot, has rocketed 52%. Pharmaceutical and engineering shares have also surged, while banks and petrochemicals have underperformed.
Almost all new buying of stocks has been by local retail investors. Most foreigners remain cautious and while sending money into Iran has become easier, full international banking ties have not yet been restored.
But foreign fund inflows are picking up. Ramin Rabii, chief executive of Iranian investment group Turquoise Partners, which manages most foreign portfolio investment on Tehran Stock Exchange, estimated $10-20 million had entered in the past three months, bringing the total near $100 million.
"We may see $100 to $200 million of fresh foreign money in the next 12 months," Rabii said.
That would still be tiny compared to the market's capitalization, equivalent to $94 billion at the market exchange rate, but it would begin to establish foreign investors as a significant force.
> Risks
However, there is plenty of risk. Debts in the banking sector, red tape and restrictive labor laws may slow any economic boom.
Initially, some companies or sectors could actually suffer as the lifting of sanctions exposes them to more competition. Renaissance Capital says steel producers' profit margins may shrink, as imports of cheap metal increase.
In an apparent effort to reassure investors that the uptrend in equity prices is justified, Economy Minister Ali Tayyebnia visited the exchange on Sunday and spoke positively about the market's gains.
But there are some powerful factors supporting the bourse's uptrend. Under many ways of valuing stocks, Iranian equities are still cheap by international standards.
"The market is trading at 7-7.5 times this year's projected corporate earnings, above its long-term average of six times, but well below 11 times for the world's frontier markets," Rabii said.
With Iran now part of the global economy, valuations may come closer to international levels.
"Falling bank deposit rates could push billions of dollars into stocks," Malayeri said.
Deposit rates soared in the sanctions era, when inflation was high and the rial weak. Authorities have begun guiding them down from above 20%.
Rabii said inefficiencies and distortions of the sanctions era had left pockets of value in the stock market, which both local and foreign investors would exploit in the coming years.
"You could buy a cement plant by acquiring a company for a third of the cost of building one from scratch," he said. "This is the kind of thing which will attract foreign investment."
