Market participants and stockholders express relief at the possibility that downward price trends have ended and stock values are near equitable levels.
Financial Tribune’s sister-publication, Donya-e Eghtesad, conducted interviews with market experts to get a clear picture of obstacles still dotting the road.
The sharp fall in share profitability, as measured by the price-to-earnings ratio; the squeeze in market liquidity; and the concomitant drop in Tehran Stock Market’s indices and share prices over the past 16 months have alarmed investors. Holders of capital have either poured their savings into safer, higher-yielding foreign investment, or have jumped on the boat of looking for short-term returns in the stock market.
These hit-and-run strategies have in turn fanned volatility and forced traders without insider information into retirement.
Nevertheless, prices seem to have stabilized and general profitability is returning, experts say. Mohammad Reza Sadeqi Moqaddam believes: “Former systemic risks either don’t exist any longer or have shrunk in importance.”
The economics professor at Tehran University’s Faculty of Management argues that the fall in interest rates plays an important role in inviting liquidity back into the market. In turn, increased lending would pull P/E ratios up.
The average P/E ratio of all TSE-listed companies has this month moved back toward its benchmark of six. This figure is above last year’s average of 5.43 but still far below the 7.1 percent P/E average reached two years ago. The rise in share profitability has kindled hopes that prices have reached a reasonable level for buying to be resumed.
Several senior capital market experts confirm this story. For example, Iman Moqaddasian says that shares have seen their value rise as they are comparatively cheap.
Another expert, Omid Qaemi, argues that small price fluctuations prove that the market is relatively inexpensive this [Iranian] year (started March 21), setting the stage for more buyers to step forward.
Gholamreza Javashi, capital manager at Goharan Omid, the investment and trading firm, disagrees in part. He emphasizes that market volatility is not necessarily caused by equitable price levels. He stated: “The market’s Daily price fluctuations have forced shareholders to follow hit-and-run strategies. Therefore, shareholders and some institutional investors have been pushed to exploit these gaps.”
Institutional investors have been the prime movers in the stock market recently. Although some experts had warned about this trend, others have pointed out that the activity of institutional investors has caused the total value and volume of transactions to increase, even though prices have not followed suit.
Moqaddasian argues that TSE is in a better condition than other competitive markets, notably the currency and housing markets. While TSE has a real economic basis on which it can grow, many other markets are “strapped for liquidity” while investors “are waiting for a strong impulse, like a nuclear agreement, before entering these capital markets.”
However, ambiguities and economic realities will continue to blot the otherwise white skyline of TSE shareholders.
Moqaddam warns that the general optimism about the success of nuclear negotiations might artificially fuel share price growth. Instead, he believes shareholders should look closely at real economic conditions and policies.
In particular, the economics professor accuses the government of introducing policies that have wreaked havoc on the ability of domestic companies to survive international competition. Most importantly, industrial products produced in Iran can be imported from abroad on subsidized credit lines, crushing the Iranian firm’s capacity to compete fairly. He said that “unprecedented imports, not facing any opposition from the Ministry of Industries, Mines and Trade, pull up the risk of selling in the capital market for manufacturing industries.” He cited rubber, sugar, tiles and ceramics as topping the list of industries endangered in this way.
Moqaddam also criticized the government’s approach to petrochemical feedstock prices. The government has increased the price of feedstock but simultaneously introduced a complex differential price system that has blown a cloud of ambiguity over at least 30 percent of TSE’s listed industries. The expert stated that these measures have “confused” shareholders and “limited transparency.”
Nevertheless, the bottom line for equitable stock market growth is that investors show more confidence. Such confidence can only occur if investors have a clear and full picture of the market conditions and the firm’s state of affairs.
Javashi believes that even though share prices have fallen to a reasonable level, buyers who enter the market “should first carefully analyze the firm’s internal structure and its own profit evaluations and predictions, as well as governmental monetary policies, macroeconomic policies, deposit rates and news on the nuclear negotiations.”
“In present conditions,” Moqaddasian concludes, “realism is more important than optimism.”
