Economy, Business And Markets

Equity Markets Rally on Positive Outlook

Equity Markets Rally  on Positive OutlookEquity Markets Rally  on Positive Outlook

Market experts have given varied reasons for the rise in Tehran Stock Exchange and the future trajectory of share prices.

Last week, equities extended their rally for the second week to a five-week high, while capping the largest two-day gain since October. Equities listed on the Iran Fara Bourse over-the-counter market followed suit.

Stocks on TSE had been crawling up for nine straight days, until trading picked up on January fifth and sixth, with the main index, TEDPIX, gaining 1.5% in the two days and closed at 62,632.80 for the week on Wednesday.

“The growth was somewhat unexpected and many investors did not anticipate it,” Saeed Eslami, chairman of Arman Ati investment consultancy, wrote in the sister publication Donya-e-Eqtesad.

The growth was fuelled by fundamental changes that led to more positive expectations about the future of equities.

“The anticipation of a reduction in petrochemical feedstock prices by the government, widening gap between the official and market exchange rates of the dollar due to the Iranian currency weakening to 37,000 rials per dollar, which bring TSE and IFB-listed companies profits, drop in deposit rates and interbank lending rates and the government’s expansionary budget for the next Iranian fiscal year (to start on March 20, 2016) are the main factors behind the rally in stocks,” said Vali Nadi Qomi, chief executive of Novin Investment Bank.

However “rumors in the market about a positive vibe in the market led certain shares higher,” said Hassan Khanjamali, Khobregan Saham’s head of investment.

Meanwhile, rumors that Russian markets would open to Iranian dairy products due to tensions escalating between Russia and Turkey led to demand for dairy shares. There were also rumors of deals between Iranian automakers and their foreign counterparts.

Furthermore, the fast approaching dates for the lifting of sanctions against Iran over its nuclear energy program have added to the optimism. Iran negotiated a historic deal in July, based on which it will mothball parts of its nuclear operations in exchange for the removal of all nuclear-related sanctions. These include asset freezes, caps on petroleum sales and sanctions on Iran’s banking sector, including its central bank.

“There is the expectation that SWIFT [international interbank messaging network’s] ban on dealing with Iran will be removed in the next few weeks,” said Behrouz Khodarahmi, secretary-general of Investment Companies Association.

Moreover, “share prices have dropped significantly in the past two years, leaving the market with little worry, about further declines,” according to Akbar Hamedi Meykhosh, head of Bourse Iran’s trading floor.

But there is something amiss. Caution.

“It is unlikely for investors to base their decisions on corporate performance, due to the current optimism,” said Khodarahmi.

Third quarter earnings reports are expected to be worse than those for the first and second quarters, which says a lot about the state of corporate Iran. Nearly all companies trimmed their earnings estimates in their last two quarterly reports.

Khanjamali said even if there are companies that report profits, they will not pay dividends due to cash flow shortages.

“Most companies will show an increase of sales on credit. Dividend payments will be very low next year,” he said.

The slowdown in the global economy and the ongoing slump in commodity prices, especially crude oil, will tighten fiscal spending and limit business investment even after the removal of sanctions. Rising tensions in the Middle East are another factor to watch.

So the bottom-line, according to Khanjamali, is that “the market is growing because of probable events, whose likelihood is in doubt, and has forgotten real, certain risks.”