Nuclear Deal Draws Traders to Tehran Stock Exchange

Some of the most dramatic evidence of change in Iran since the nuclear agreement that brought sanctions relief to the country is visible in Tehran’s stock market.

"In the past 18 months, about 193,000 people have sought permission to trade on the bourse," Tehran Stock Exchange Corporation's Chief Executive Officer Hassan Qalibaf-Asl said.

At least 45 companies have applied to list their shares since the onset of the current Iranian year (March 21) and he expects as many as 13 initial public offerings within 12 months, compared with seven in the corresponding period of the year before.

“The market has been on the rise” since the agreement was implemented in January 2016, Qalibaf-Asl said in an interview with Bloomberg at his office in the Iranian capital.

"The May reelection of President Hassan Rouhani, who backed the accord, was a further 'positive signal' of continuity for the market."

Iran, the second-largest economy in the Middle East with industries spanning energy, mining and automobile, holds clear potential for foreign investors and Europeans have been at the forefront of new business deals since the easing of a decade of strict sanctions.

However, remaining US curbs and concerns that President Donald Trump may undermine the nuclear agreement or slap further measures on the country of 80 million people have slowed the return of banks and companies.

The value of stocks traded in Tehran more than doubled in 2016 to the equivalent of about $19.6 billion, as the market’s main index climbed 29%.

"In the first half of 2017, the benchmark dropped 1% and the value of stocks traded fell 37%. That’s not all due to Trump," said Payam Afzali, the head of investment banking at Kian Capital, said by phone from Tehran.

“We have false negative sentiment due to the fact that interest rates are so high. You can get much higher returns if you put your money in the bank. But the message communicated by the government has been time and time again in the past year-and-a-half that we are going to implement policies to bring down the deposit rates and that is going to affect investors’ sentiment toward the risk of equity in the public market.”

Qalibaf-Asl said investors are not obsessing about potential actions Trump may take.

“Politics is important, but it’s not all about political news,” he said. “The market reacts to economic variables. While Trump’s election and his pressure on Iran have not been helpful, the real impact on the market would only be felt from steps endangering the nuclear deal, rather than mere talk."

Qalibaf-Asl noted that in contrast with the interest shown by locals, foreigners have been slow to participate, partly due to practical difficulties in transferring money and the lack of established brokerage and settlement networks.

“A foreign investor may want to be present, but the fact is the mechanism, or working with its own brokerage firm, the issue of custodianship. These are things that need to be addressed,” he said. “Some investment banks abroad are looking at buying brokerage firms in Iran to establish brokerage relations. If these relations happen, the presence of foreign investors will grow.”

> Index Inclusion

Iranian stocks trade at attractive valuations, with average price-to-earnings ratios of seven, compared with the 14 to 16 typical of frontier markets, emerging markets and the rest of the Middle East, said Ramin Rabii, CEO of Tehran-based financial services group Turquoise Partners. "But, for Iran to become a mainstream investment destination, it needs to win inclusion in international indexes," he said.

The odds are against that, as “the large banks are not here, large credit rating agencies are not here, because of the fact that American investors are not here”, Rabii said.

With US companies compiling many of the global indexes, Iran is unlikely to be included in them anytime soon, “which means that large flows of capital will not happen”, he added.

Here are further comments from Qalibaf-Asl on the bourse’s efforts to expand trading:

- The exchange has signed preliminary agreements with 12 foreign bourses and is in “serious negotiations” with the Istanbul Stock Exchange about the listing of fixed-income bonds.

- It has proposed to the Iranian government that companies be able to issue foreign-currency denominated bonds. The central bank is considering the initiative, which would help local companies meet foreign-currency needs and reduce currency risks for foreign investors.

- Foreigners hold no more than 1% of the Tehran exchange’s market capitalization. They are present in 36 out of 38 industries represented on the exchange, including oil, gas, petrochemicals, mining and food.

- There remains potential for a large share of foreign investors, if money transfer complications can be resolved.

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