Understanding Iran’s Stock Market
In 2019, the Iranian stock market was the best performing equity market in the world. Over the course of the year, the market doubled in value in dollar terms, with the capitalization of the Tehran Stock Exchange exceeding $300 billion. Yet, while the equity markets were reaching historic highs, Iran’s economy remained in a recession as sanctions continued to stymie economic growth.
Part of the reason as to why stock soared while the economy languished is that sanctions make it difficult for Iranians to invest abroad. High-net worth individuals and cash-rich companies have sought ways to invest their cash, particularly as a hedge against inflation and general economic uncertainty.
There are nearly 700 companies listed on the Tehran Stock Exchange and the Farabourse, a junior market. Among these, industrial companies, especially those with a large domestic market share or a significant export market, have performed especially well. Producers of chemicals, steel, glass, detergents, pharmaceuticals, and food products are among the companies that have posted robust profits in a difficult economic environment.
Inflation and supply chain difficulties are pushing costs higher—but the best performing companies can make sure revenues rise at a faster clip. In the 10 years through July 2021, the Tehran Stock Exchange has delivered investors annualised dollar returns of 13.8%. This is compared to 4.7% returns for MSCI Emerging Markets index and 5.7% for the MSCI Frontier Markets Index.
Part of the reason for the market’s strong performance has been the expansion in the number of retail investors. Ordinary Iranians are becoming more interested consumers of financial products—often with the help of the government. Since 2006, Iran has issued “justice shares,” dividend-paying shares in state-owned enterprises, to low-income households as a way to redistribute wealth. Last year, a program was initiated to enable these shares to be traded on the Tehran Stock Exchange. On one hand, the move served to boost an already overheating market. On the other hand, the move helped expand access to investment in the capital markets to the working classes. By some estimates, 50 million Iranians are newly invested in capital markets. Whether the move was good policy is debatable, but what is clear is that there has been a significant expansion in the number of retail investors in Iran.
Many of these new retail investors poured into the overheated market of 2020, often making irresponsible financial decisions. The Tehran Stock Exchange has since undergone a correction, which was painful for those who invested at the record prices. But in the long run, the rapid expansion in the investor base is positive. Iranian companies have become more responsive to shareholders, understanding that strong performance will be reflected in the share price.
So far, foreign investors have played a minor role in the development of Iran’s capital markets. In 2016, following the lifting of international sanctions, a handful of investors established funds to get exposure to the Iran “story.” But no major institutional investors have invested in Iranian equities. In this regard, Iran’s capital markets are unique. They are becoming more mature and more sophisticated without significant foreign investment. Of course, Iranian asset managers are playing a long game, preparing the groundwork for the eventual influx of foreign capital. But until then, Iran’s capital markets will continue to develop, creating an important means for companies to finance their expansion. For those able to invest in such companies without going through the capital markets, there is tremendous upside.
Photo: TSE