Iran has been in the headlines as of late for many things, nuclear negotiations, further sanctions by the UN, US and Europe, military developments, and human rights, but one headline that might be a stark contrast is Tehran Stock Exchange or TSE's rocket performance lately. It has been breaking its all time highs daily for the last couple of weeks and the World Federation of Exchanges has ranked the TSE as the second best performing in the first half of this year. With this in mind there has been speculation in the last couple of weeks on whether the TSE surge of nearly 60% (in the first half of this year) is forming a bubble or is simply healthy growth.
The TSE has come a long way from its start in 1967 when only 6 companies were listed to today’s 420 and a market capitalization of over $80 billion dollars. The market is a combination of state firms, semi-state firms, and private firms trading daily Saturday to Wednesday.
Critics will say...
Critics of the current boom will say that state firms are simply buying up shares to increase prices but this logic does not answer why around 2004 when the market started sliding and stayed depressed for a few years those same state firms did not do the same thing and buy up shares to artificially raise prices. In reality it is much more complex. In 2004 an amendment to the constitution was made after years of attempts by parliament and arbitrary bodies to agree to changes. It was finally agreed by the Supreme leader of Iran that 80% of all government owned companies must be sold to the private sector. As most students of economics will know, the transition from state control to private ownership is easier said than done. The Soviet Union and East Germany are prime examples of how difficult this process can be. Finding individuals or organizations willing to fork over billions of dollars for massive state companies is no easy task in a country where private investors only owned 20% of the economy at the time. So understandably privatization was hitting roadblocks. The market started a slide as more companies started listing on the TSE. This slide was magnified as commodity prices started to nose dive as the world economy took a turn for the worst. Many of the largest listed firms where iron steel, other mineral, and cement firms that were seeing international prices reduced and therefore exports being effected.
So what changed?
A new head (Ali Saleh Abadi) of the stock exhange was named with a mission to turn things around, and that he did. Transparency was improved by forcing stringent new rules on companies that are listed and requiring financial data available for investors, an electronic system was set up for tracing market abuse, and insider trading with fines or imprisonment for law breakers, new systems were also set up recently to handle large numbers of transactions. The first ever futures contracts were established on July 23th starting with 2 private banks. This was targeted towards foreign investors wanting to take advantage of the rapid surge. Further supporting foreign investors have been new rules scraping prior requirements of keeping investments in Iran for 2 years and can now be removed at any time.
Reasons for growth
The reasons for growth are multifold. As property prices in Iran have stayed stagnant over the last 2-3 years, this highest return on investment in the last couple of years has forced investors to look for new places for their cash and with inflation at 9.1% as of July 22nd, the returns have to be good. The TSE has rebounded since last year as commodity prices regained their march upwards as the economies of China and India are racing ahead and needing raw materials like steel and cement. Additionally, Iran is facing 4 rounds of UN sanctions and US and European unilateral sanctions targeting for one the financial sector, this has caused many Iranian investors to pull back their money home where it is safe from being frozen. Also, as the markets of Dubai started crashing both in their real-estate and their many extreme projects including man made islands and in door skiing malls, Iranian investors were burned. Iranian investments have been estimated fueling roughly 30% projects in Dubai. Having the chaos of the election turmoil of 2009 quieted down, investors are feeling safer to venture out with their money. One last major reason is, Iran is quite different than the Iran of 2004 that set out trying to private 80% of its economy. Today, private banks are much larger and stronger with increased capital to invest. Mutual funds were introduced a couple of years ago drawing in funds from small and medium investors. Pension funds in Iran are also somewhat different from other countries. As the state had large amounts of debt owed to these pension funds, instead of transferring cash, there has been a stock for debt exchange made, and with dividend returns paying relatively high returns (13% quoted by the Financial Times) these pension funds will be well funded for the next couple of years.
What does the future hold?
The government has said they want to sell another $50 billion in government assets in the future to meet their goals. With local investors gaining and looking for further returns, regional investors sitting on billions of dollars of oil capital that have no better place with such returns as what the TSE offers, and a stock market capitalization of $80 billion for an economy of $335 billion GDP and a more internationally acceptable GDP PPP of $876 billion the potential for growth is enormous. The overall market is trading at a weighted average price to earnings (PE) ratio of 6.2 times, close to its historical average of 6 times. Some companies are trading at double-digit PE ratios, according to Ramin Rabii, managing director of Turquoise Partners, the Tehran-based fund manager (Financial Times). With these realities don't expect to stop seeing the TSE continue to set new records.
Written by Amir Taheri, Contributing Blogger