The stock market’s general trend is not necessarily followed by all industrial groups listed in Tehran Stock Exchange and Iran Fara Bourse.
With the expected opening of the Iranian economy, foreign investors will quickly realize that the share prices of an industry cluster fluctuate according to the position it occupies in the country’s domestic capital market. And although this relationship might be fading as Iran globalizes and foreign capital flows in, the inevitable growth of domestic industries, not least the oil industry, will ensure the continuing relevance of investment decisions taken by Iranian individuals and the state.
While some Iranian industries, particularly those related to mineral resources and dependent on exports, are strongly influenced by global price movements, there are several key industries that are almost solely domestically oriented. These industries include financials, producers like the sugar industry and long-established industrial enterprises, notably car manufacturing, house appliances, clothing and cigarette industries.
Sugar-related industries have most clearly bucked the TSE’s downward trend over the past three months, with share prices growing 40% against an overall fall. At the end of the last trading week, while the overall index was down 1.9%, sugar industries were up 2.6%.
Some key market participants believe sugar companies have become the target of speculation in reaction to a generally underperforming TSE.
CEO of Behshahr Industrial Development Corporation, Mohsen Bazar-Noei which is a central shareholder in the two largest sugar refineries in Neyshabour and Shahroud, says: “Share price growth has been a direct consequence of speculation by a few shareholders who flood low-capital listings, like the sugar industry, to achieve high share price growth in a depressed stock market in order to sell their stocks with considerable profit.”
The sugar industry’s speculative status in Iran’s profit-seeking capital market earns it a beta rating of around zero for the past month. The beta rating is often used in finance to indicate the correlation between particular baskets of stocks to the general price index. A figure below one indicates that asset movements are unrelated to the market trend, being either not as volatile, or having its volatilities move in unexpected directions.
In contrast to this particularly unpredictable and high-risk industry, financials and car manufacturers lead the market in debt and industrial activities respectively. Hence, both are inherently related to important political decisions as well as the general TSE trend. This high beta for both has been fluctuating at around 1.7 during the past month.
However, these two industries also differ in key aspects. Due to the isolation of Iran’s capital market, outside events have little effect on the value of bank assets. Additionally, all market participants, not least the government, depend on the health of the financial system, which has been tasked in recent years for providing credit and liquidity in the cash-strapped economy. The government’s stake in keeping this system alive also severely reduces risk of a financial meltdown or bankruptcy.
In contrast, car-related shares have responded much more aggressively than both financials and the overall index to international and sanctions-related political decisions. This is due to the dependence of the domestic car industry on imports and partnerships with foreign companies, some of the most important of which, like Peugeot, have major US-based shareholders and are thus strictly tied to the sanctions regime.
Additionally, domestic car producers are not able to satisfy demand fully, with a significant and growing segment composed of imported foreign cars.
In fact, most industrial enterprises experience these contradictions in one way or another. As market leader, the car industry is not only an epitome, but also manifests the vulnerability of the entire industrial sector to foreign competition and products.
To the chagrin of some institutional investors, state support for the industrial sector, although part of the government’s official discourse, is not unconditional and depends on the ability of industrial firms to hunt for productive investments and keep or expand their consumer base.
So while financials and industrials share their dependence on the domestic market, risk in the industrial sector, excluding mining or natural monopolies, tends to be higher than for financials.
One exception has so far been the pharmaceutical industry, as it has been excluded from the sanction regime and is well protected by the government. The share price index of pharmaceutical companies has experienced very little fluctuation regardless of nuclear developments. Nevertheless, even this sector will likely join the other domestically-dependent industrials when trade barriers are slowly removed.
