Despite last month’s agreement between Iran and the West, which lays out the framework for a possible final nuclear deal in June, the Tehran Stock Exchange has not fared well. The TSE’s irresponsiveness has kindled debate on whether sanctions are the only important impediment to foreign investment.
Mohammad Reza Pourebrahimi, member of the Secretariat of the High Council at the TSE, believes that an end to the sanctions will definitely attract foreign investors. However, he also argues that “20 percent of the problems of this market” relate to the nuclear standoff, while “the remaining 80 percent depend on the state of the economy,” Eghtesad News quoted him as saying in an interview.
Indeed, the TSE’s main index exploded after the sanctions were tightened in 2012, from 25,000 in early 2013 to almost 90,000 in early 2014. While much of this fierce growth was caused by high inflation and a drop in the value of the rial, it also reflected the profits to be reaped by some in an environment of rapidly increasing international competitiveness as labor costs fell and the weak rial supported exports.
Over the past year, the TSE has slumped as this inflationary drive came to an end and concerns arose about the price-to-earnings ratios of many firms. Depressed domestic demand and a lower oil price are also important factors.
On the other hand, Alireza Askari Marani, a stock market expert, believes that sanctions aside, the TSE misses the essential infrastructure to attract foreign interest.
Like many other frontier markets, the TSE lacks key instruments found in many more developed stock exchanges. Derivatives, short or margin trading are not found at the TSE, and neither are the sophisticated Islamic finance instruments as introduced by for example the Dubai exchange.
The TSE has inherited a legal framework from before the Islamic Revolution that aimed to attract foreign investment. At the same time, it has relatively tough corporate reporting requirements. Shahin Shayan Arani, an expert in capital markets, defends the legal institution that supervises share trading in Iran. He said that the Securities and Exchange Organization has acted “rationally” and “has allowed the market to stabilize.”
Nevertheless, medium to low transparency is a benchmark of the TSE, as it is of other frontier markets.
Many of the largest firms listed on the TSE have been privatized over the past few years. However, even government officials have complained about the extent to which private ownership structures have become intertwined with state institutions. Hence, it is argued that the TSE’s success has become mashed up with government priorities and revenues.
Some experts, like Rouzbeh Pirouz, head of Turquoise Partners – a Tehran-based investment fund – argue that ultimately these state institutions follow a profit motive and they would eventually sell lower performing shares. Western institutional investors could see opportunities in these assets.
The cancelling of sanctions and the opening up of the TSE to foreign investment might also work to improve transparency.
“When they (foreign investors) come in, the sophistication of the market will increase dramatically,” Pirouz was quoted as saying by the Wall Street Journal. “They’re going to demand better management, better performance. They’re going to be better shareholders.”
