Iran: Equity Markets Extend Gains as Debt Markets Stabilize

Iran’s main and junior equity markets ended November with gains of 4.0% and 6.0% respectively in local currency terms, lifted by falling bank deposit rates and gains in global commodity markets. In US dollar terms, the Tehran Stock Exchange rose 1.9% while the Iran Fara Bourse was up 3.8%, according to Turquoise Partners’ latest newsletter published this month. Below is a summary of the report.

On the bond market, Islamic Treasury Bills yields to maturity declined in recent months and stabilized since October between 15% and 16%. The CBI managed to fix one-year deposit rates at 15% by setting penalties for banks violating the cap.

The TSE continued its positive performance for a fifth consecutive month as the overall index rose by 4.0% in local currency terms, bringing the YTD performance of the TSE to 14.4%. The euro strengthened 4.2% versus the rial last month, extending its YTD rally to 15.5%, which is broadly in line with the global appreciation of the euro since the beginning of the year.

Consistent with the government policy of maintaining the current level of competitiveness and following the election of President Hassan Rouhani in June 2013, the free market rate had experienced a well-managed depreciation, gradually moving from 41,620 rials against the euro in the summer of 2013 to about 50,250 Rials now.

The rial is priced against a basket of currencies that does not include the US dollar. The rial is more affected by the fluctuations of the euro, which in turn gained value against the US dollar in 2017. An example of this, on a YTD basis, the free market value of the Iranian rial lost 4% against the US$, which is significantly less than the 15% depreciation it has experienced versus its European peer.

In the bond market, after a sharp decline in yields of the listed T-Bills in the recent months, there have been signs of stability in the interest rates in November. Shervin Shahriari, chief investment officer at Turquoise, believes 15-16% would be the resistance level for interest rates given the fact that the CBI has fixed the annual deposit rates at 15%, which is widely offered by Iranian commercial banks to depositors across the country

An area where there is significant potential is on the earnings front. There has been a consistent trend of positive profit adjustments during the year and with interest rates remaining steady, we see the equity market undergoing a rerating in the near future.

Turquoise Partners’ internal calculation of earnings shows that a 10-12% increase of earnings is expected for 2018 in US$ terms. That is based on its  internal investment analysis stating an increase of GDP 4-5% (IMF) with inflation steady at 10% along with productivity growth at 2% and depreciation of the currency in the range of 5-8%. Consistent with this outlook, Shahriari foresees a double-digit return for the equity market in 2018 should regional tensions maintain an element of calm.