Economy, Business And Markets

Financial Market Gears Up for Liberalization, Global Integration

Financial Market Gears Up for  Liberalization, Global IntegrationFinancial Market Gears Up for  Liberalization, Global Integration

The prospect of Iran’s capital market liberalization and integration into global financial markets in the post-sanctions era was reviewed by Islamic finance  specialist, Hassan Daher in a seminar hosted by the Securities and Exchange Organization on Tuesday.

Daher (PhD in Islamic finance from the International Centre for Education in Islamic Finance, Malaysia) is an independent researcher, consultant and Chartered Financial Analyst.

Daher explained that financial liberalization means allowing both inward and outward equity market investments.  

“Foreign investors can, without any restriction, purchase or sell domestic securities, and domestic investors can buy or sell foreign securities. So, it basically means inward and outward capital flows into the financial markets,” he noted.

Referring to the obstacles that hinder liberalization, Daher mentioned foreign ownership restrictions and taxes imposed on foreign investments as direct and tangible barriers, while pointing out unavailability of transparent data, accounting standards and investor protection laws as some indirect barriers.

He observed the importance of transparent accounting data, noting that veteran investors often refer to accounting standards to gauge their investment. “Companies should disclose their accounting policies, which is considered as the most important factor in portraying the company’s financial status.”

Daher also noted that some risks and uncertainties pertain specifically to emerging economies such as Iran, among them being the political issues, liquidity shortage and currency fluctuations. He observed that currently in Iran, the biggest risk lies in currency fluctuations.

“Since Iran is faced with currency risks, many investors are not eager to enter the market as they cannot hedge the currency risks through different types of financial instruments, leading to restriction in the capital inflow,” said Daher, concluding that indirect barriers have a greater effect on prices than direct barriers.

Liberalization needs to be well planned to ensure that the benefits outweigh the costs.

Daher noted that since the Iranian capital market has not yet been integrated into the global markets, foreign investors having diversified international portfolios tend to have mixed perspectives about the country. They are cautious about the covariance between cash flow of emerging markets such as Iran and the world market.

“The equity market is most likely to record an unprecedented price hike if and when a nuclear agreement is reached between Iran and the P5+1 (the five permanent members of UN Security Council plus Germany) by the June 30 deadline, which would lead to removal of economic sanctions [imposed against Iran by the West over Iran’s nuclear energy program] and linearization of the Iranian financial market,” said Daher, observing that another price hike could be expected as Iran’s market becomes further integrated into the world market.

He explained that when Iran’s market is liberated, the covariance between the local and world market cash flow would be very low, encouraging international investors to rush into the market in the hope of getting risk adjustment returns. But, as the local market matures, the covariance is expected to rise, exposing the Tehran Stock Exchange to fluctuations in the global market.

“At this point foreign investors are expected to lose their interests as the equity market becomes more risky,” he noted.

“When investments flow into the equity market, prices could be expected to fluctuate constantly. However the market’s share in the gross domestic product is expected to rise,” he said.

Observing that the emerging markets are partially segmented, he noted that reducing market segmentation plays a significant role in reducing the cost of capital.

“Once the investors flock into Iran’s equity market, the cost of capital is expected to decline, which means that the companies listed in the stock market will have access to cheaper capital.”

Daher also mentioned that new financial instruments and well-designed economic policies are necessary to attract foreign investors.