The Tehran Stock Exchange (TSE) has been viewed as a phenomenon in the midst of the declining Iranian economy. The TSE Price Index (TEPIX) currently hovers at about 59,000 — up more than 500% since 2009, about 50% since the beginning of the current Iranian year (March 21) and about 28% since the election of Hassan Rouhani as president (June 14). As the following graph indicates, there are occasional adjustments downward — such as in the days running up to the presidential election on June 14 — however, the overall trend is upward. The question is how one can understand this uninterrupted rise and what factors are influencing this phenomenal growth.
TSE Price Index since the beginning of the current Iranian year
The TSE started its operations in 1966. After the first oil price rise (1973-1974) and along with the increase in foreign exchange revenues, TSE activities increased considerably and the number of listed companies reached 102 in 1978. In the aftermath of the Islamic Revolution (1979) and the Iran-Iraq war (1980-1988), trading in many companies was suspended and turnover reduced to almost zero. Since 1988, the TSE has seen sustained periods of growth in trading and market capitalization, only interrupted by short downturns in 1997-1998 due to an overheated market, and in 2005 due to political uncertainties — following the election of Mahmoud Ahmadinejad. Market capitalization of the 320 companies currently listed on the TSE stood at 2,904,320 billion Iranian rials or more than $115 billion at the currency exchange rate as of Sept. 1. The growth in the number of listed companies is a direct consequence of the fact that most state-owned companies have been privatized through a listing of their shares on the TSE.
It is evident that the TSE’s growth over the past few years and its recent rise do not correspond well with a stagnant economy, undermined by trade and financial sanctions, mismanagement and high inflation and unemployment. Experts disagree whether the growth is a bubble that will burst at some point, or whether it is an indication of a growing capital market.
The factors that have contributed to the TSE developments include the following:
- Impact of privatization: As mentioned above, the Iranian government has been actively selling the shares of government-owned companies on the TSE. Though the actual liquid shares of such companies are usually around 20%, the entry of such shares increases the market capitalization and also the volume of trading. In many cases, the actual market prices for shares of privatized companies is higher than the IPO price, which pushes up the index.
- Growing confidence and contribution of small investors to the TSE: Iran still has a cash-based economy and the expansion of the country’s money supply as a result of cash subsidies — money supply has grown sevenfold between 2005 and 2013 — has attracted many small investors to share trading. According to Khalil Arjomandi, acting director of Tose’e Financial Institute, currently up to 30 billion Iranian rials ($ 1.2 million) of new small investments flow into the TSE on a daily basis. The enormous rise of the TEPIX since the presidential elections is a reflection of the fact that many small investors are shifting their investments in gold and hard currency toward the TSE. Some experts argue that the stock market is not capable of absorbing the totality of the funds that are interested in investing in company shares.
- Presence of attractive companies in the TSE: Arjomandi underlines that the presence of profit-making companies such as the Telecommunications Company of Iran, as well as some of the privatized entities such as car makers and mining and exporting companies, has boosted the market enormously. Furthermore, the generally positive performance of listed companies despite economic issues and financial crises has increased investor confidence in TSE investments.
- General optimism about the Rouhani government: The country’s business community is optimistic about the new administration. According to Ali TehraniNasr, a director of the Atieh Bahar Consulting in Tehran, “the Iranian business community hopes that Rouhani and his economic team will improve the country’s business climate and also take a more supportive approach toward domestic production and industries."
- The impact of exchange rate corrections: Many of the successful listed Iranian companies are export-oriented and the devaluation of the rial has had a positive impact on their business outlook, hence attracting large and small investors.
- Lack of access to foreign financial markets: The TSE is also benefiting from the current sanctions. In other words, banking sanctions have made it more difficult for wealthy Iranians to transfer their funds overseas, and they are compelled to park their money in the local stock market. The same is valid for many Iranian banks that traditionally diversified their investments by allocating some funds to international investment. TehraniNasr explained, “With sanctions set to remain in place, and alternative investment opportunities for Iranians increasingly limited, the lure of the stock market is likely to attract a growing number of Iranian investors.”
- Impact of inflation: The high inflation rate and price increases have also had an effect on the tangible assets of many listed companies. In addition, the depreciation of the rial has increased the fixed asset value of foreign equipment of many companies, also pushing up share prices.
The above list is not exhaustive, and it is mainly meant to show that there are valid technical or financial reasons why investor interest in the Iranian capital market has expanded. There will also be other factors which will contribute to this process. For example, the plan to make the so-called “justice shares” — company shares issued to civil servants and lower income classes in the process of privatization — tradable at the TSE will inject further liquidity into the market.
However, the mere growth of the stock market is not an indication of a growing economy. In fact, the contrast could not be harsher: A fast growing capital market in an economy that may experience a third consecutive year of economic decline. This phenomenon is yet another reminder of the current imbalance that the Iranian economy finds itself in. The imbalance is further aggravated through internal and external tensions and uncertainties, especially sanctions.
The biggest absentee in this market is foreign investment. In fact, despite the introduction of relevant laws to facilitate foreign investment at the TSE, currently actual foreign investment is negligible, mainly due to banking sanctions impeding such dealings.
Despite the enormous growth, there are also many structural issues and problems in the TSE. Industry insiders complain about the lack of transparency on why sometimes TSE management decides to suspend trading in some company shares. The occasional suspensions make company shares illiquid and work against the interest of small investors. Furthermore, brokers and investors suffer as a result of irregular activities; for example, the fact that most large companies are engaged in investment activity, even though they are not registered as investment companies.
It remains to be seen whether the new government will pay attention to capital market reforms that will be needed to consolidate this important economic phenomenon. For now, the TSE will continue to benefit from the imbalanced economic and financial realities in the market, but it will also need to institutionalize new laws and regulations to increase transparency and its attraction to big and small investors, even as and when the Iranian economy finds a new balance.
Bijan Khajehpour is a managing partner at Atieh International, the Vienna-based international arm of the Atieh Group of Companies, a group of strategic consulting firms based in Tehran, Iran.