September 30, 2010 / 8:35 AM / 9 years ago

Iran's bourse booms despite sanctions

TEHRAN (Reuters) - In the busy foyer of the Tehran Stock Exchange an old woman in a black chador clutches her shopping bag and gazes up hopefully at the electronic display showing the latest share prices.

EDITORS' NOTE: Reuters and other foreign media are subject to Iranian restrictions on their ability to report, film or take pictures in Tehran. A trader speaks with a stock market official beneath the electronic board at the Tehran stock exchange September 15, 2010. REUTERS/Caren Firouz

Like the other Iranians bustling past her, she is betting on a market that has soared to record highs despite ever-tightening international sanctions, lacklustre oil prices and political uncertainty after last year’s disputed presidential election.

While U.S. diplomats were busy upping Iran’s economic punishment over nuclear activities Washington fears are aimed at making a bomb, Iranian shares, which might have been expected to fall, have, instead, gone through the roof.

Tehran’s Tepix index has risen 65 percent to all-time highs this year. Its latest record was set on September 18, when it hit 18,658, up from 11,295 at the start of the year. By comparison, New York’s S&P 500 Index has made no major gains this year as the U.S. economy struggles to recover from the financial crisis.

Officials say privatisation, cheap valuations and moves to cut red tape and encourage private investors have lured Iranians away from the once-booming property market, the traditional home of the Iranian nest egg, which stagnated in late 2008.

The world’s fifth-largest oil exporter hopes to raise $12.5 billion by privatising over 500 state firms during the 2010-11 year, and plans to sell all of its refineries and petrochemicals units, promising potential investors a solid pipeline of IPOs.

Iranians are also increasingly reluctant to park their spare cash in the bank, where interest on instant access savings has fallen from about 12.5 percent three years ago to 6 percent now.

Those rates seem healthy compared to Western economies, where central bank rates are near zero, but are no match for the rewards promised by a bourse which already boasts more than 330 listed firms and a market capitalisation above $70 billion.

Speaking in his office on the upper floors of the stock exchange, bourse chief Hassan Ghalibaf Asl summed up the logic: “The opportunities and good factors affecting the growth of the capital market and attracting investors are more important, and the weight of them is more, than bad factors.”

WHAT KIND OF INSTITUTIONAL INVESTORS?

Few dispute however, that the bad factors are there. From a lack of transparency to tightening sanctions, myriad challenges belie the Tehran Stock Exchange’s stellar performance.

Firms related to the elite Revolutionary Guards and other state bodies have bought large stakes in privatised companies, further muddying the waters between public and private in a country where powerful quasi-official foundations pervade.

Last year, a consortium linked to the Revolutionary Guards took a controlling stake in the Telecommunications Company of Iran for $7.8 billion, raising concern that some firms being put up for sale are just being transferred within the public sector.

Investments by these vast semi-official or politically connected organisations have caused the surges in stock prices that small investors have been happy to ride, Meir Javedanfar, an Iran expert at Middle East analysis firm Meepas, said.

“Very few stock exchanges have record gains in a country where sanctions, economic isolation, unemployment and inflation are increasing,” he said.

“All indicators point to this boom being a government-made bubble. It’s difficult to predict when it will burst.”

Even in parliament, questions are being asked about the disconnect between soaring share prices and an economy facing not just sanctions but looming cuts to multi-billion-dollar state subsidies that currently guarantee cheap fuel to domestic industries and reduce the cost of goods for Iranian consumers.

Many small investors are ordinary Iranians, who could end up suffering the most if boom turns to bust.

Sheltering from the blazing sun under the porticos of the bourse building, a man sits on a fold-out stool and sells economics text books laid at his feet on sheets of newspaper.

Traders, the majority apparently amateurs, pass him on their way inside to swap rumours as they crowd around touchscreens, looking up data provided by the bourse on their chosen stocks.

Iranians can place orders with professional brokers, without having to go in person to the bourse, but the building, with its atmosphere of anticipation, attracts scores of people, placing their cash alongside institutions like Iran’s pension funds.

Apart from one turbaned cleric and a handful of women, most are middle aged men, and the mood is optimistic though smaller trades are driven largely by rumour, since rules requiring listed firms to disclose their performance and plans are lax.

With his boy-band haircut, jeans and T-shirt, 26-year-old Navid Sadri is not the typical day-trader on Tehran’s bourse, but he has been making his living on the market for eight years, long enough to know that a boom usually ends in a bust.

“Eight months ago there was a very small crowd,” he says, pointing to the amateur traders hovering in the corridors above the bourse’s modest trading floor. “If every day there’s a bigger crowd it’s a sign that there will be a drop.”

FOREIGN INVESTORS

While domestic investment in the bourse booms, international sanctions and political uncertainty are hampering the flow of foreign funds and expertise that Iran needs to modernise.

Foreign investment on the Tehran bourse accounts for just 0.5 percent of the shares, according to the bourse chief.

“We don’t even look at the Iranian market. There is just too much political risk involved,” Robert McKinnon of ASAS Capital, an asset management company in Dubai, said in June, when bourse officials travelled to the city to drum up foreign interest.

In an effort to attract cash from abroad, Iran revoked a rule this year that had forced foreign investors to hold their initial capital in the Islamic Republic for three years.

While foreign investors can now repatriate their capital whenever they want, U.S. rules ban any bank that does business with the United States from making transactions with Iran. That rule is enough to keep most major international banks at bay.

So far, Tehran’s bourse has lured only a handful of smaller institutions willing to gamble on the world’s riskier markets.

Fund management company Castlestone calls Iran stocks “a jaw-dropping opportunity” and plans to include them in a new high-growth emerging markets fund.

Turquoise Partners, an investment firm with offices in Tehran and London, manages a $100 million fund on behalf of foreign investors wanting a piece of the Iranian action.

“We’ve had a flood of money coming into the market in the last one and a half years,” Ali Mashayekhi, head of investment research at Turquoise, said.

Editing by Lin Noueihed

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