Systematic Risks on TSE Horizon?

Movements on all fronts, be they social, political or economic, move stocks one way or another, ranging from slight tremors to shockwaves based on the development’s magnitude.

One might even say stocks are oversensitive to change. And with an inherent quality like that, working in the ever-changing landscape that is Iran might become a downright disquieting experience, especially when it comes to overarching political risks.

With this in mind, market regulators have recently come up with a scheme to protect the market and especially smaller-scale investors from crises and systematic risks.

The Capital Market Stabilization Fund was introduced on Tuesday by Economy Minister Masoud Karbasian and became operational on the same day. The idea was first introduced in 2014 as part of the legislation titled “Removal of impediments to competitive production and elevating the country’s financial system” that was implemented in June 2017.

Based on Clause 28 of the law, the fund is meant to “control and reduce systematic risks in Iran’s capital market in the face of financial and economic crises and enforce governmental policies in the aforementioned conditions to maintain and foster a competitive environment.”

 Buoyant Outlook

According to Mohsen Khodabakhsh, Securities and Exchange Organization’s head of markets management, the fund will operate with an initial 3 trillion rials ($75 million) of capital acquired from the National Development Fund of Iran.

“Further funding will also be provided from a cut in the Securities and Exchange Organization’s commission on market transactions as well as 1% of NDFI’s annual revenues,” he added.

Khodabakhsh described the likely systematic risks where the fund will intervene as interest rate and inflation fluctuations, recession and war, Bourse24 reported.

He noted that “JCPOA is part of possible political [risks] that can affect the market, in which the fund will take action if needed”.

The official was referring to the Joint Comprehensive Plan of Action, the formal name of the deal Tehran reached with world powers in 2015 to resolve a longstanding dispute over Iran’s nuclear program.

Most of the sanctions imposed on Iran’s economy were lifted in January 2016 when the nuclear pact was implemented.

JCPOA potentially enabled Iran to reopen its economy to the world. However, with the US President Donald Trump’s fiery rhetoric toward the landmark deal, dark clouds of political risks are on the horizon for Iran’s business climate. And as the economy’s barometer, stocks will surely react.

The curious timing of getting the fund running just days before Trump’s Friday announcement regarding JCPOA seems to suggest SEO officials are bracing themselves for a market upheaval.

Or, the market’s possible downturn could have already happened, with losses spread over the last two weeks, while strong production data and a devaluing currency for H1 promised a strong third quarter for investors.

“The [Iranian capital] market usually reacts to events, whether positive or negative, before they happen, and the market has already lost some,” Sepeher Investment Bank’s corporate finance manager, Mohammad Semsari, told Financial Tribune in a telephone interview.

The analyst forecasts the next few months to be rife with political risks that, in an interesting twist, might boost export-oriented industries.

He emphasized that a weakening rial has already made exports more lucrative, and with the psychological effects in place, political risks will further affect the forex market.

Accordingly, other markets, including the capital market, will take cues from forex fluctuations, albeit with a certain lag.

Semsari also criticized SEO’s lack of transparency regarding the fund’s operational mechanisms

“We have no idea what shares the fund’s assets will be made up of or what industries they will be targeting,” he said, adding that the best-case scenario would be that the fund functions as a cushioning force in case of crash and an accelerator at times of growth.

 Cut in Market Regulators, Brokerages’ Commissions

The commission earned from market transactions by SEO, TSE, IFB and all brokerages is set to be cut by 25%, 20%, 20% and 5% respectively as of Saturday, announced the chairman of Securities and Exchange Brokers Association, Rouhollah Sanei.

The new directive, announced on Wednesday by SEO, sets the commission rates for SEO at 0.0006, for TSE and IFB at 0.00064, and for brokers at 0.0076 of each transaction.

“The cut in commissions is expected to increase trade volume and market liquidity,” the official was quoted as saying by Securities and Exchange News Agency saying.

The cap for commissions on transactions has also been increased from 200 million rials ($5,000) to 300 million rials ($7,500).

Sanei emphasized that the reduced rates will not have an adverse financial effect on market regulators and brokers’ balance sheets, as coupled with the new regulations regarding the reopening of frozen shares, the firms will simply have more transactions to have a cut from.

The new regulations the official was pointing to were announced last week by Karbasian. They included opening all stocks’ tickers in 60 to 90 minutes after the SEO has received the required financial information, as well as keeping financially opaque firms’ shares closed for a maximum of 30 days.

 Stocks End Trading Week Lower

Given the somber mood, Tehran Stock Exchange’s main index TEDPIX lost 685 points or 0.8% during the third week of the month that ended on Oct. 11 to close at 84,744.1.

The main index of the smaller over-the-counter exchange Iran Fara Bourse IFX shed 14.69 points or 1.5% during the week to end at 929.71.

Trading at Iran’s stock market starts on Saturday and ends on Wednesday.

Over 3.31 billion shares valued at $264.8 million were traded on TSE last week. The number of traded shares and trade value grew by 69% and 67.3% respectively.

TSE’s First Market Index shed 571 points or 0.96% to end at 58,548. The Second Market Index dropped by 1,020 points or 0.54% to close at 189,146.3.

At IFB, more than 1.44 billion securities valued at $298.2 million were traded. The number of traded shares grew by 77% while trade value dropped by 10%.

Its First Market witnessed the trading of 89 million securities valued at $3.75 million. About 597 million securities valued at $38.15 million were traded in the Second Market.

Over 9 million debt securities valued at $212 million were also traded at IFB.

 News IPOs in the Pipeline

However, in a combative stance, four new companies are gearing up to have their initial public offering on the equity market this week.

The first is the 7-trillion-rial ($175 million) South Kaveh Steel Company, which was listed on TSE last year but was unsuccessful in floating its shares. The steelmakers’ managers are set to hold a meeting today to work out the details of offering 10% or 700 million shares in “KVEH” this week.

Parsian Leasing Company is next. The 1.3-trillion-rial ($32.5 million) firm was listed on TSE back in March and will expectedly offer 10% or 130 million of its shares.

Atrin Nakh Qom, the 88th firm to be listed on IFB’s second market, has also announced it will offer 15% of its shares. The company has an initial market capitalization of 100 billion rials ($2.5 million).

A 10% stake in East Azarbaijan Pegah Company is also ready to be offered this week.

 Italian Asset Manager Makes Foray Into Iran

At the other end of the spectrum, the Italian Azimut Group signed an agreement on Monday to acquire a 20% stake in Mofid Entekhab, an asset management company in Iran.

Mofid Entekhab is a subsidiary of the Mofid Group, the largest brokerage firm and financial advisory in the country, reads the two companies’ joint press release.

Azimut, a €48 billion group headquartered in Milan, is the first global financial institution entering Iran with an equity investment in a company providing financial services licensed by the local regulator, Securities and Exchange Organization.

It is an Italian independent asset manager active since 1989 with offices in Italy, Luxembourg, Ireland, China (Hong Kong and Shanghai), Monaco, Switzerland, Taiwan, Brazil, Singapore, Mexico, Australia, Chile, US, UAE and Turkey.

“Today we are making a historical first step for a global player entering the Iranian financial market,” said Sergio Albarelli, CEO of Azimut Holding.

Mofid Entekhab is part of Iran’s privately-held Mofid Group, a holding company with $89 million in assets. Entekhab, the asset management business, was carved out of its Mofid Securities business last year.

Azimut will buy the stake through AZ International Holdings, its Luxembourg-based unit. Azimut and Mofid also plan to establish a fund, domiciled in Luxembourg, for foreign investors to invest in Iran.

“Our strategic goal is now to capitalize on our track record as the leading financial intermediary in Iran and create with Azimut a benchmark for the local asset management industry,” said Hamid Azarakhsh, chairman of Mofid Securities.

He said his clients “will be able to access a new suite of financial advisory and wealth management services in line with the highest international standards”.

The parties have ensured that the partnership will be compliant with economic sanctions requirements.