Systemic Challenges Facing Iran’s Equity Market

Stocks do not have much going for them these days. The uncertain economic outlook and persistent market depression have dented investor confidence.

Experts believe the equity market is unlikely to budge during the two months left to the end of the current Iranian year (ending March 20, 2017), and will remain in slumber until the upcoming presidential elections in mid-May.

“Currently, the capital market is not reacting to the good news coming from global markets as well as the foreign exchange market. Political and economic ambiguities have caused investors to be passive to any developments,” said Mohammad Gorjiara, a market expert and university lecturer, in an interview with the Persian economic weekly Tejarat-e Farda.

“A less ambiguous political climate could have propelled Tehran Stock Exchange to register significant growth and break records, considering the recent price hikes in primary commodities such as methanol, urea, iron ore and steel,” he said.

However, the market has not lived up to its potential so far this year. 

TSE’s main index TEDPIX dropped by 0.9% in the Iranian month of Dey (December 21-January 19) to end at 79,382. 

The over-the-counter Iran Fara Bourse’s main index, IFX, also shrank 3% to finish at 845.

According to Gorjiara, the main factors hindering growth in the equity market include the domestic and global uncertain political conditions, worrisome macroeconomic indicators and the allure of the debt market and banking deposits.

  Unclear Political Climate

Donald Trump’s fiery rhetoric during his presidential election campaign against the Iran nuclear deal and his ascent to the US presidency cast a shadow on sentiments about Iran’s economic future. 

This uncertainty was recently fuelled by the passing of Ayatollah Akbar Hashemi Rafsanjani, a key moderate player and advocate of free-market policies.

Historically, Iran’s equity market has reacted significantly to political developments. It recorded its largest annual gain for the past decade in 2013, the very first year of President Hassan Rouhani’s four-year term. “The growth came solely based on political factors,” Gorjiara said, adding that economic indices had barely moved during the year. 

Similarly, when Trump won the election on November 8, TEDPIX plunged by about 5% in one day, even though the prices of key commodities soared.

  Macroeconomic Worries

Iran’s economic performance in the current year has largely been good, if not impressive.

Latest statistics released by the Central Bank of Iran indicate that gross domestic product during the first half of the year grew 7.4% compared to last year’s similar period. 

According to the CBI report, most of the growth came from the oil sector.

As a result of the removal of economic sanctions against Iran, the country’s oil production increased by 18.8% to 3.92 million barrels per day during January-September 2016, according to the US Energy Information Agency. 

Iran aims to lift output to 5 million barrels a day within two or three years—at least 1.3 million barrels a day above what it was in 2010, the year before international sanctions were introduced.

Inflation remains in the single-digit territory after it fell below 10% for the rolling year ending June 20 for the first time in about a quarter century. 

According to the statistical Center of Iran’s latest data, the average goods and services Consumer Price Index for urban areas increased 6.9% in the 12-month period ending January 19, which marks the end of the Iranian month of Dey, compared with last year’s corresponding period.

However, there may be cause for concern when it comes to the growing trend of monetary base.

Growth in broad money and the central bank’s monetary base currently hovers around 30% and 20% respectively. 

In the past few months, the government has forced down interest rates, resulting in a shift in the type of bank deposits from long-term savings to sight deposits, which contributed to broad money growth.

In March 2014, the beginning of last Iranian year, the economy posted a broad money growth rate of around 25.3%, decreasing from the 30% registered a year before.

The number further shrank to 22.3% in March 2015 showing a slow and gradual pace in contraction of liquidity. This changed a few months back when the government adopted an expansionary monetary policy to stimulate demand and move the industrial sector out of recession.

Then there is the pressing issue of unemployment. SCI put Iran’s unemployment rate in summer at 12.7%. The figure registers a 1.8% increase compared with last summer and a 0.5% rise compared with the previous quarter (March 20-June 20, 2016).

The new data show 3.33 million Iranians were unemployed in Q2. It also shows 10.4% of men and 21.8% of women of ages 10 and above were jobless during the period.

According to SCI, the unemployment rate was 14.4% for urban areas and 7.9% for rural areas. Joblessness was higher among women compared to men and among those living in urban areas.

The youth unemployment rate, i.e. the proportion of the population between the ages of 15 and 29, stood at 26.7% in summer, registering a 3.3% rise compared with the same period of last year and a 1.8% increase over last quarter.

According to presidential advisor, Masoud Nili, the government of President Hassan Rouhani is among the world’s top five in generating an annual average of 704,000 jobs.

“But this extraordinary achievement has gone unnoticed because of the sharp rise in the number of job-seekers,” he added.

  Allure of Bank Deposits, Debt Market

The Iranian financial system is largely bank-centered and lenders are going through a rough patch. The government and the private sector’s debt to banks currently stand at $64 billion and $224 billion respectively. This has sapped the banks’ lending power and caused them to offer higher interest rates, effectively luring capital away from the equity market. 

According to Gorjiara, the same goes for fixed-income securities, as they boast compound interest rates of up to 25%.

Over 10 million bonds valued at $250.4 million were traded in the last Iranian month, recording an 80% surge in both trade volume and value compared to the previous month.

As Gorjiara noted, the payback period of banking deposits and debt market is expected to exceed that of the equity market. With interest rates and returns on bonds reaching up to 20%, investments would pay back in five years, whereas investments in the equity market with an average price-earnings ratio of 7.5 have a payback period of seven and a half years. The rising gap between the two markets is expected to further weaken investor sentiment.

Gorjiara forecasted that export-centered industries such as petrochemical, mining and pharmaceutical sectors will have a positive performance by the yearend, as they can grow on the back of a weakening rial. 

Other industries relying on domestic demand, however, will have a hard time catching up.