TSE Rollercoaster Ride Ends 1st Quarter Higher

Tehran Stock Exchange’s primary index TEDPIX gained 1,506.2 points or 1.95% during the first quarter of the current Iranian year (March 21-June 21) to end at 78,736.2. The over-the-counter Iran Fara Bourse’s all-share index, IFX, added 28.12 points or 3.21% to 903.50.

Khordad, the eventful third month of the year (May 22-June 21), witnessed the two exchanges wiping most of their gains in the first two months of the year, as enthusiasm over Iran’s presidential election results faded and Tehran was hit by two terrorist attacks.

TSE and IFB trading opened the new Iranian year on March 25, 2017. TEDPIX started the year at 77,230 and IFX at 875.8.

Paper, sugar and computer stocks were the top three performers during the three-month period, growing by 68%, 48.2% and 38% respectively. The three industries were among the few showing an upward trend in the third month, when most indices were falling.

This is while the ‘financial markets management’ index, with Tehran Stock Exchange being its sole listed company, was Q1’s worst performer, going down 18.7%. About 10% of the decline took place in the third month alone.

Metal miners and metal product manufacturers followed with 10.8% and 6.8% decline. Oil, banking, transportation, cement and financial institutions also recorded drops.

> Wild Fluctuations

The first month of the year (Farvardin) was rather uneventful, as the stocks rose rather steadily in the absence of systematic risks. TEDPIX gained 1.84% during the month (March 21-April 20) to end at 78,651.4. IFX was up 3.6% to close the month at 907.78.

Stocks had a phlegmatic trend for most of the second month, save for the significant upsurge that came about on May 20 as the final results of the presidential election race were announced and the incumbent President Hassan Rouhani was reelected.

TEDPIX jumped 3.2% during the month to end at 80,123 and reach its six-month high. IFX grew 2.1% to an all-time high of 927. The growth was short-lived, however, as there was no tangible economic incentive for investors to maintain the uptick.

The third month coincided with the holy month of Ramadan, widely known to be a period of lower productivity in the economy. Coupled with price corrections, sliding global oil and commodity prices such as iron ore and the Central Bank of Iran’s initiatives to get banks in line, stocks were in for a bearish time.

Things further exacerbated during the month’s third week, when two terrorist attacks hit the capital city–one in the parliament building in downtown Tehran and another at the mausoleum of the founder of Islamic Republic, Imam Khomeini.

Seventeen people were killed and 52 others were wounded in the twin attacks, which were claimed by the self-styled Islamic State terrorist group. TEDPIX and IFX reacted by dropping 0.67% and 1.76% respectively on the same day.

Market analyst Ali Nikoogoftar believes that not much is bound to change in the market’s course until at least the fifth Iranian month of Mordad (starting July 23).

“Optimism was high during the elections, but things are normal now. The market will move slow and wait for the new Cabinet in Mordad,” he told Financial Tribune.

He added that prices are nearly at bottom lows right now and unlikely to go down any further.

“What the market needs is for the government to undertake expansionary fiscal policies and slightly alter inflation. We can also be hopeful that oil prices will rise, leading to the government boosting construction budgets,” he said.

What determines all this, Nikoogoftar emphasized, is how Rouhani will form his Cabinet.

Investors expect to see fresh, pro-market faces, he added.

> Banking Conundrum

For better or worse, banks have traditionally been the main driving force behind the Iranian economy. However, these days, they lack the stamina to go ahead though. This has got investors perturbed.

Losses incurred by giant exchange-listed banks have hurt the market and the system’s overall weakening has disturbed the capital market’s money supply.

“Banks face severe issues in lending . . . and one of the most important plans of the 12th administration (the new government) is to reform the banking system,” said President Rouhani in a meeting with business owners and investors over the weekend.

Iranian lenders were in their prime back in the 2000s. Former president Mahmoud Ahmadinejad’s easing of banking regulations allowed private and state-owned banks to flourish.

A boom in oil revenues translated into rampant government spending and explosion in money supply. However, lack of oversight and a weakened CBI combined with the government forcing lenders to finance its extravagant projects meant things were going in a downward spiral.

Then came international sanctions imposed against Iran over its nuclear program. The housing market stagnated and businesses went bust. Consequently, banks were unable to sell their properties and recoup their loans. No bank went under, though, as they simply brushed the losses under the carpet. They covered the bad loans with new loans and eventually filled their balance sheets with bad debt.

In order to address the sea of red ink, the CBI mandated banks to adopt the International Financial Reporting Standards for accounting transparency. Yet, most banks went on to report huge losses under the IFRS and exchange officials froze several banks’ trading symbols to prevent a market panic.

Many months later in January, Bank Mellat’s shares reopened for trading and their value dropped 38% in one day, as most of the losses were out. Tejarat Bank and Post Bank met the same fate.

On another front, CBI is battling unlicensed banks and credit institutions that sprouted like mushrooms during the Ahmadinejad era. Residing in the informal money market, these institutions reportedly hold 25% of the entire liquidity. They have also been recognized as one of the main reasons why any further decline in interest rates, which currently stand above 15%, is not happening. This is while CBI has long targeted a 2-3% gap between interest rates and inflation.

The CBI's latest report shows the average goods and services Consumer Price Index for urban areas in the 12 months ending May 21 increased 9.8% compared with last year’s corresponding period.