Economy, Business And Markets

Optimism About P/E Ratios

Optimism About P/E Ratios Optimism About P/E Ratios

Price to earnings (P/E) ratios are not likely to fall any further this year, said Saeed Shirzadi, capital manager of the Civic Pension Fund Investment Company – the investment arm of one of Iran’s largest investment funds – in an article written in Financial Tribune’s sister newspaper, Persian daily Donya-e Eqtesad.

Both the stock market and P/E ratios have plunged over the past year. However, sanctions only cannot be blamed for this trend, Shirzadi argues, as P/E ratios for most industries jumped after the tightening of sanctions in 2012 and the removal of Iran from the global SWIFT system, through which the vast majority of international financial payments are made. P/E ratios averaged 5.3 percent in the past month of Ordibehesht, which is slightly lower than last year’s average of 5.43 but still significantly below the 7.1 percent P/E average reached two years ago.

Shirzadi argues that the main reasons for the current profit squeeze are to be found in what he termed as “destructive competition” involving banks, high petrochemical feedstock prices and the government’s drive to reduce inflation. As inflation has fallen below interest rates, banks have vied to offer the highest rates, which has put pressure on their profitability and ability to stimulate liquidity.

Secondly, the government increased the feedstock prices of petrochemical products, one of Iran’s main export products, from 3.5 cents to 13 cent last year. The move severely handicapped petrochemical exports by reducing their regional competitiveness. In comparison, Persian Gulf feedstock averages hover around 7 to 8 cent.

Lastly, the Rouhani administration has successfully brought inflation down from an average of 35 percent two years ago to 15.5 percent this Iranian year (started March 21). This has meant pushing through contractionary monetary policies that perk in liquidity and state funding.

However, the economist is optimistic. He refers first of all to investor hopes that a deal with the West on Iran’s nuclear energy program will be reached. Indeed, this will be one of the most important elements in driving up profitability in the future.

Additionally, the dollar-rate of the rial looks set to stabilize this year. Currency stability is essential for the fortunes of traders, only a few of whom have managed to profit from wild and unpredictable moves in the value of the rial.

The Iranian economy has also remarkably little international debt, standing at less than 2 percent of GDP. Low international debt makes it easier for domestic companies to attract foreign finance. Lowly indebted balance sheets are exceptional in developing markets.

Although real net profits increased by 37 percent annually in the Iranian year 1392, which ended in March 2014, they fell to 496 trillion rials the next year, a drop of 10 percent. This volatility seems to have stabilized in the current Iranian year – so far profits have only fallen by 1 percent. For example, Shirzadi predicts that profitability in the iron ore industry will not fall significantly, although other industries, notably those that suffer from sanctions or bottlenecks, might fare worse.

Shirzadi believes that government support for the industrial sector will be crucial to spur an expansion of the capital market and increase P/E ratios. Nevertheless, he believes P/E ratios have stabilized and will start to increase once capital markets embrace expansion.