Economy, Business And Markets

Equities Stuck in a Rut

Equities Stuck in a RutEquities Stuck in a Rut

Boredom, uncertainty, frustration. These three words best describe equity traders these days. Institutions and individuals alike have had to endure a bear market that has reigned for two years now. But the drop in activity in the past four weeks is a record in itself.

Volatility has been ironed over and trade volume squeezed, meaning there are neither real buyers nor sellers in Iran's equity markets.

Of the two exchanges in Tehran, the larger Tehran Stock Exchange's main index, TEDPIX, has been stuck around the 63,000 points mark for a month—less than 2,000 points above a two-year low, around which the index hovered for three weeks from the turn of the second half of the current Iranian year (started March 21).

Iran Fara Bourse has been relatively more active during the period. The over-the-counter market has shadowed TSE's moves, nevertheless.

TEDPIX'S morbid state represents the state of private and state companies amid the ongoing recession, brought about by tightening fiscal spending, a crunch in lending, sanctions and low consumer.

The recession is felt more acutely in TSE, as larger companies have been hit harder by the conditions, as they were too slow to respond to the crisis. TEDPIX'S biggest move in the past month was a 0.5% downtick. The rest of the days it barely moved more than 0.2%.

Trade volume has also been low, hardly exceeding 300 million shares on any day, while on good days volume exceeded 1 billion shares.

On the other hand, companies listed on the IFB proved more resilient to the downturn. Also, as IFB is less than a fifth of TSE's size by capitalization, its index fluctuates more freely.

On Sunday, the IFX gained 0.51% and closed at 707.15 points. IFX moved over one percentage point, only once in the past three weeks. Daily volatility has ranged between 0.3% and 0.7% most of the days in the past month.

But why the low market activity? Basically because buyers are holding off bullish bets till market conditions improve. The removal of sanctions is much anticipated by traders who expect economic conditions to improve markedly once foreign business arrives.

Shareholders believe their stocks have hit rock bottom and with the prospect of lifting of sanctions, are postponing stock sales. Unavailability of short-selling and stock futures, along with strict controls on price changes, is further depressing trading.

As the chief executive of Bourse 24, Reza Qahremani told Financial Tribune that return on market equity is not competitive.

"The TSE's average price to earnings ratio—a measure of stock returns—is around five. That would put stock returns around 20% while banks and government bonds offer 25% interest, pretty much risk free."

So, no buyers then. What about those with a foot already in the market? Well, not many individuals are into equities these days and the existing investors are there for the long haul. They prefer to wait out the storm for favorable winds. Most of the companies, however, are owned by institutional investors that are stuck with their portfolios.

Any selling on their part at current price levels would mean incurring huge losses—something chief executives are avoiding strictly.

With the lifting of sanctions against Iran in sight, a hold strategy for shareholders seems plausible. Sanctions against Iran's banking system and oil industry, along with other nuclear energy sanctions, will be removed as soon as Iran places curbs on its nuclear energy program, as part of a deal made between Iran and P5+1—the United States, Britain, France, China and Russia, plus Germany—in July this year. The implementation is likely to take effect as of early 2016.

The removal of sanctions, plus a shift in the Iranian government's stance toward a more open and internationally integrated economy, will increase foreign investment and commercial activity. Bullish investors are waiting for the turnaround and later company earnings to spur a bull run.

Promises from the central bank to bring down borrowing costs, enforce its cap on deposit rates and lower it below 20% have further reinforced the case for staving off bullish buying.

So the low market activity is almost as much a product of a hopeful future, as it is one of past economic turmoil and prevailing inertia.

How long the flat beat of equity markets is going to last is entirely dependent on the rise in real business activity, which—despite calls that monetary easing will solve everything—rests upon the solution to a multitude of economic issues. These include the repayment of overdue government debt to banks and contractors, restructuring of banks and the toxic debt held in their balance sheets to get lending going again and bring down the cost of money, removal of sanctions on banking and oil industries, streamlining of business regulations and the improvement of purchasing power through growth of real wages.