Tehran stock market may remain strong despite Iran’s economic slowdown

The Tehran Stock Exchange benchmark managed to surpass its historic highs just before the end of the Iranian fiscal year on March 19. Total annual yield has reached a huge 187%, recording the strongest annual growth in the existence of the stock market. Interestingly, the equally weighted index, the barometer applied to measure the performance of small listed companies, skyrocketed over the same period. 437%. All of this happened at the same time that business activity faced macroeconomic risks due to significant setbacks facing the Iranian economy as a whole.

The TSE trend is expected to continue in the current fiscal year despite the declining effects of the coronavirus epidemic. However, the stock market may not appreciate the luxury of climbing as much.

While this record performance may seem at odds with the dire economic situation in the country – they are in fact somewhat linked, as a budget deficit drives the government to print money, which results in faster growth of liquidity.

A key factor behind a prediction that the benchmark is about to rise again this year is the government’s huge budget deficit for the current fiscal year. Although the budget has not yet been approved, it is expected to be at least a deficit 1.31 trillion rials, or $ 9.5 billion in NIMA rate, an online exchange rate platform managed by the Central Bank of Iran. What is obvious is that the government will not be able to collect much of its budgeted revenue, including tax revenue, in the current circumstances of the Iranian economy.

Meanwhile, the volume and value of Iranian oil sales fell sharply due to US sanctions and the coronavirus crisis. Consequently, the government has no choice but to use measures such as increasing the monetary base to offset the deficit, leading to a spike in inflation. And while this is unfortunate for the weakness of the Iranian economy, it sets the stage for stock prices to climb even higher. Since even if the volume of sales tended to decrease, inflationary pressures would compensate for the loss because they sell the same product at higher prices. As a result, the net profit margin would remain in the green thanks to an increase in the consumer price index.

Another underlying factor that can undoubtedly help the stock market recovery is the gradual rise in the value of the US dollar against the Iranian rial. The dollar has already started to strengthen after a period of relative stability and is currently trading at 16,620 rials on the open market. The growth in the price of the dollar against the rial has always been a powerful driver for the main stock index. In the past two years, as the recession has weighed on the Iranian economy, the devaluation of the rial has massively contributed to record jumps in the index, as inflationary expectations have not been properly anchored. Thus, provided that there is no political agreement in 2020 between Iran and the administration of American President Donald Trump – whose tendency has been to continue to impose new sanctions, not to lift them – the dollar is expected to soar and reach worrying new levels.

It should be noted that Iran’s economic growth has been around 0% and minus 7.6% with and without oil sales, respectively, in the first three quarters of 2019-2020 according to the report released on February 9 by the Statistical Center of Iran. Liquidity also exceeded the annual average of 25% above 28% in the same period. All this indicates that the price of the dollar is ready to exceed and contribute to the inflation rate. A jump into the the value of the dollar the rial could help Iranian export companies to sell their products more expensive when the price is converted to rials and offset the drop in world prices following the coronavirus epidemic. It could also help domestic companies maintain their competitive advantages over their foreign peers.

However, some experts believe that the benchmark will not reach new milestones this year. They cite the dizzying growth of some penny stocks combined with falling commodity prices on world markets. There is no doubt that some companies have experienced wild races, mainly because of speculative activities and the ignorance of new Iranian investors. As the dollar rises, share prices of the major commodity companies are expected to rise despite the downward trend in their markets around the world.

Meanwhile, in the absence of strong parallel markets capable of competing with the stock market today, excess liquidity has nowhere to turn.

In addition, the government is betting heavily on the stock market to make up for its budget deficit. Even if the Iranian central bank manages to control the volatility of the dollar – which, as mentioned above, seems unlikely – this year could still be considered good for the stock market. The government used the capital market boom in the past two years to compensate for excess liquidity and divert it from massive defection to parallel markets. Similarly, President Hassan Rouhani’s government intends to offer its additional state properties this year on the stock market. He should sell valuable assets 500 trillion rials (($ 3.7 billion), or eleven times more than the previous year. This indicates that the government is determined to finance its budget deficit through the stock market, which places particular importance on the prosperity of the stock market.

Last but not least, the capital raised by revaluation of assets led by some members of the stock market, causing an upward movement and coincidentally raising the stock market index of the previous year. This may also be the case for the current year. There are still big names in steel and petrochemicals who have not used this mechanism in recent decades and are intrigued to follow suit. Rising inflation has increased the value of assets such as land, equipment and machinery owned by listed companies and in particular the big names. And now that it has become extremely difficult to make new investments, the revaluation of assets has drawn the attention of retail investors to a large extent to these companies. the Iran Telecom Company is a recent example of a large company updating its book value after heavy inflation in recent years, when this is totally without taxes.

It seems that the revaluation of assets, following the dramatic devaluation of the rial in recent decades, must be taken into account when analyzing the value of a typical business. Some market experts tend to interpret a high price / earnings ratio as evidence of an immediate stock market merger. They are partly biased in their analysis, because the price / profit ratio alone may not deflate the peak of the gauge.

In the final analysis, taking advantage of the current market boom to offer state and private companies on the stock market could undoubtedly improve the depth of the market. In addition, this could guarantee the growth schedule of the gauge for the benefit of the economy as a whole.