DUBAI Dec 12 Iranian share prices have rallied
40 percent in the past four months, at odds with the country's
deteriorating economic fundamentals under the weight of
sanctions and raising the risk of a stock market bubble,
While a weak currency, high unemployment and double-digit
inflation are contributing to a contraction in the Iranian
economy as Western sanctions crimp the country's energy and
banking sectors, some listed companies are benefiting as a sharp
currency devaluation has made them much more competitive.
That is boosting the share prices of companies like Sina
Chemical Industries, up 145 percent since October, and Abadan
Petrochemical Co., up 18 percent in that time.
Surging demand for shares, however, also reflects high
inflation, a devalued currency and a lack of alternatives for
local investors to park their cash, making the stock market
overvalued and vulnerable to a sharp fall, analysts say.
Sanctions imposed by Western countries that have cut much of
Iran's access to the global financial system have made it
difficult for wealthy Iranians to send their money overseas,
said an economist in Tehran, who did not wish to be identified.
"There are some people who got extremely rich in the past
few months, again because of the devaluation of the unofficial
rate of the rial," he said. "They don't really have the option
of sending their money to banks abroad or investing in other
countries, so they invest in the Tehran Stock Exchange."
The Tehran Stock Exchange's (TSE) main index, TEPIX, closed
at a record high of 33,889.4 points on Dec. 11, and is up from
around 24,000 in August with daily turnover averaging $67.1
million this year.
The heady gains have led exchange officials to warn
investors not to get carried away by the recent rally.
"Experience tells us that buys must be made on the basis of
analysis and a long-term view," said Mahmoud Reza Khajeh-Nasiri,
a senior exchange official, according to the Iranian Students'
News Agency in October. "Investors ... should not be caught up
in the excitement."
With 300 or so listed companies, the bourse has a market
capitalization of $120 billion, at the government's exchange
rate for the rial currency.
The rial has lost more than half its value in Iran's open
market in the last year as sanctions have prompted Iranians to
convert savings to hard currency on the view that reduced oil
exports and foreign exchange earnings will limit the central
bank's ability to defend the rial.
It now sells for about 30,000 to the U.S. dollar in the open
market. The government maintains a much stronger "reference"
rate for the rial of 12,260 to the dollar that is only available
for the import of some basic goods.
Depreciation of the rial has made foreign imports more
expensive and boosted demand for locally made goods as the
Iranian government has also limited the imports of some items in
a bid to preserve its foreign exchange reserves. That is
supporting the rise in some local companies' shares.
"If there are additional restrictions imposed by outsiders
or by the Iranian government on imports, then Iranian companies
would become more profitable due to additional demand for their
products and services," said Hossein Ebneyousef, president of
the U.S.-based International Petroleum Enterprises, an oil and
gas consultancy firm.
The stock market rally is also driven by demand for shares
of companies seen as benefiting from a large gap between the
government's official rate for the rial and the currency's
"Stocks of some companies such as those in mining industries
and base metals have become popular as a result," the economist
in Tehran said by phone.
They include the shares of Chadormalu, a producer of iron
ore concentrate, which have jumped 67 percent since October.
The main players on the bourse, which opened in 1967, are
banks, pension funds and "bonyads," or wealthy charitable trusts
that control a significant portion of Iran's non-oil economy, as
well as a pool of retail investors.
Foreign investors accounted for just 0.5 percent of listed
companies' share ownership in 2010, the latest available data.
Iran's oil exports have plunged by more than 50 percent in
the last year as a result of U.S. and European Union sanctions
aimed at cutting Tehran's funding for a nuclear programme
Western countries suspect is designed for military purposes.
That has cost Iran up to $5 billion per month, according to U.S.
Tehran denies the programme is for nuclear weapons.
Since the European Union implemented an embargo on Iranian
oil on July 1, the TSE has risen by 33 percent and with
sanctions set to continue, Iranian money is likely to keep
pouring into the stock market.
"Other investment opportunities for Iranians include gold,
but gold prices have risen considerably as well and are also
linked to the dollar so that's not a real option," said
Ebneyousef. "The next traditional option is real estate,
although that too is getting very expensive and unaffordable."
Apartment prices in Tehran in the spring of 2012 were 31
percent higher than a year earlier, according to official
statistics reported by the Hamshahri newspaper, as wealthy
Iranians saw property as a relatively safe haven.
Some Iranian retail investors however said they did not feel
confident investing in stocks, partly because any gains are
susceptible to a further devaluation in the rial, especially if
Iran faces another round of sanctions.
From February next year, U.S. law will prevent Iran from
repatriating earnings it gets from its shrinking oil export
trade, a powerful sanction that will "lock up" a substantial
amount of Tehran's funds.
"Only a few months ago we saw how the (currency) market went
upside down in a few days," said Mehdad, 37, who runs a private
family business and did not wish to be identified in full. He
was referring to a 35 percent drop in the rial's value in late
September and early October, after a government move to prop up
the currency backfired. "There is no guarantee that wouldn't
happen again. Investing in rials is a big mistake."
Others said the market did not reflect the fundamentals of
Iran's economy, which the IMF forecasts will shrink 0.9 percent
this year, and was distorted by inflation running officially at
25 percent and the weaker rial, which pushes up the nominal
price of stocks though their real value remains the same.
"I see and hear with my own eyes and ears that companies and
factories are going bankrupt on a weekly basis," said Bijan, 54,
who owns a carpet shop in Tehran's Grand Bazaar, and did not
wish to be fully identified.
"How can the TSE be doing so well? There is no way I can
trust such statistics and I won't invest in the TSE as long as
everything is manipulated and unclear."
Some shares already reflect that, including stocks of car
manufacturers, which have slashed production this year as the
cost of components soared. Shares of Iran Khodro, Iran's largest
vehicle manufacturer, ha v e plunged 36 percent since October.
But with sanctions set to remain in place, and alternative
investment opportunities for Iranians increasingly limited, the
lure of the stock market is likely to remain. That will expose
Iranian retail investors to risk if further sharp swings in the
rial or unforeseen political events prompt institutional
investors to withdraw their money from already inflated assets.
"The TSE is effectively a sanctions-subsidized market," said
Paul Sullivan, a professor of economics at the National Defense
University in Washington, D.C.
"It is a bubble. More sanctions could end up pumping it up
more ... The savings in Iran have to go somewhere within Iran if
other options are blocked."