As inflation-combating policies have taken hold on the economy, investment-based markets like the stock exchange and housing have again started to outperform price-based markets like currency and gold coin, according to a recent report by Donya-e Eghtesad.
The 12 years of data on which the report is based show that these two markets have rarely moved in one direction. While investment-based markets are a reflection of real economic factors such as investment, productivity and real returns, price-based markets move along nominal factors, notably the international price of liquid assets like currency and gold.
Holders of capital move their asset to either market depending on the economic situation. While their underlying economic mechanisms are often overlapping, these four markets are also in competition with each other.
Only in the Iranian years from March 2008 to March 2009 and March 2014 to March 2015 have slumps in all four markets been witnessed. In 2008, the prime cause of shared recessions was the global financial crisis, which not only caused gold prices to temporarily plunge, but also lowered investment in housing and stock markets as the price of oil and other basic commodities plummeted.
The more recent annual all-round market recession should be seen in light of President Hassan Rouhani administration's contractionary monetary policies to fight inflation, falling profitability of productive assets, illiquidity due to sanctions and uncertainty created by ongoing nuclear negotiations.
According to the report, there was not one year in which all four markets have grown together.
Although the housing and stock marketa are ultimately dependent on real values, speculation has also been a major factor in these markets over the past years. The spike in inflation after 2012 initially caused both markets to record strong growth, only to fall in recession since 2014.
While all four markets posted negative real returns in the last Iranian year, the housing and stock markets look set to outperform price-based markets in the foreseeable future.
The report predicts that demand in the housing market will increase this year as the government is gearing up to implement a new social housing program, lift the ceiling of housing loans and subsidize private investment in the housing sector. It also found that there is a tendency for the housing market to perform well in economies dependent on oil exports, like Iran's, as surplus capital is channeled into real estate and short-term investment as opposed to long-term, productive investment in industry and agriculture.
Similarly, investment will pour into the stock market if and when western sanctions (imposed against Iran over its nuclear energy program) are lifted. Already now, profitability is slowly returning to the companies listed at Tehran Stock Exchange.
Another factor that would help spur growth in the stock market is the return to growth of global commodity prices. Not only has oil reached its trough, other major commodities have also stabilized. Consequently, producers of these goods will once again see an uptick in their fortunes, channeling some of their profits back into stocks.
On the other hand, the coin and currency market will probably not record equally attractive real returns. Not only has the government made price-stability a priority and radically reduced the rate at which the monetary base of the economy grows, experts also predict that gold will not be a good investment this year. Since 2012, gold prices have fallen from record highs. They have hovered around $1200/oz since late 2014.
The currency market has only posted real returns once over the past 12 years – in 2012. That year saw the tightening of sanctions against Iran, causing the government to take emergency measures to prevent the flight of the rial by keeping its official value artificially low to prevent inflation.
Although increases in the dollar value of the rial have lagged behind inflation over the past two years too, this has not been due to government restrictions but to Iran's improving economic condition. Indeed, oil-dependent economies often suffer from overvalued currencies, a phenomenon that reduces the competitiveness of many domestically produced goods unrelated to the oil industry. The gradual appreciation of the rial is a response to the stabilizing conditions of its economy.
The rising fortunes of investment-based markets is bad news for the vast majority of Iranians, many of whom will not be able to trade on markets any more. While many normal Iranians have used their little savings to buy gold or trade in currency, they often do not possess the necessary assets to enter the stock or housing market.
