Financial Markets E1:R3
◢ Markets are stable reacting primarily to a global rebound in equities and commodity prices
◢ Company revenues will remain flat as market fundamentals have not shifted and Iran has not yet seen the impact of post-sanctions capital inflows
Global Rebound Boosting Confidence in Iran
The TEDPIX advanced 1% last week to close at 74,514 on Wednesday’s trading session, after peaking at 74,820– a level that created a sense of stability in the market. The positive performance of the TEDPIX also came at a time when trading for auto and banking stocks, traditional market drivers, had been halted. When trading resumes we expect both auto and banking stocks to rise as well. Therefore, we are optimistic about the index returning to the 76,000 level last seen in June. Metals and mining companies and petrochemical companies can be expected to lead the steady rebound.
Some of the market’s positive performance in the first quarter of the current Persian calendar year 1395 – the second quarter of 2016 – were influenced by a recovery in global equity markets, particularly for metals and minerals. Markets have already started to witness the positive impacts of recent monetary policy including the lowering of interest rates, which has encouraged more capital to come into listed equities.
It is important to note that analysts expect flattening revenues and a drop in profits across most sectors. The fundamental position of Iranian companies has not yet changed following the lifting of international sanctions and so near-term expectations are already reflected in the share price. It is unlikely, barring any geopolitical shocks, that TSE shares will see significant shifts in the remainder of the summer months.
First quarter (Iranian calendar) performance reports showed positive trends in profits for pharmaceutical companies as in previous years. In metals and mining, iron, copper and general metals have already seen positive outcomes of a recovery in global prices. In the construction sector, cement and other related industries have seen no positive developments. In oil products sector, analysts expect to see a positive performance for the first quarter of the Iranian year. This follows the satisfactory performance of the same group over the past year. The banks are still subject to the impact of a recent scandal over pay for top bankers. They are also dealing with the consequences of a decision by the Central Bank of Iran to increase their assets to lower their risks.
On the last day of trading on the TSE, trading on Islamic Treasury bonds reached a volume of IRR 194 billion (USD 5.5 million). The value of transactions in total trading stood at above IRR 427 billion (USD 12,200).
Meanwhile, the banking sector is still feeling the impact of the CBI decision to lower the lending rate to 15%. There are nevertheless some banks that offer rates at as high as 20% for investments made on special funds. On the other hand, officials announced this week that the High Economy Council has approved to allocate an interest rate of 18% for participation bonds for state projects. Yet, it appears that the cause for the current recession in the Iranian economy – and specifically the financial markets – is still the high real interest rate.
Over the past week, there were no major fluctuations in USD/IRR rate as compared to the week before. Nevertheless, it ended the Persian calendar month of Tir (21 June-July 2016) by registering a 1.5% increase which was the highest such increase in almost nine months. It appears that the rial will remain in the region of IRR 35,000 to the dollar. In the past months, the government intervened and supplied extra dollars to stabilize prices when the IRR first broke above the 35,000 mark against the dollar. Still, this stopped from early August when the dollar first entered the channel of IRR 35,000 and the prices accordingly proved to have already stabilized.
Analysts expect to see a surge in demand for the US dollar over the next few months. This is mainly due to an anticipated surge in summer travel to foreign destinations. On the other hand, as officials have already speculated, there will be a rise in demand for the dollar for trade.
Investors should be aware of an upcoming decision by the government to unify the rates for the dollar. It appears that the CBI is trying to use the free market as the base for trading hard currencies. And this will be carried out at a single rate.
The upcoming surge in demand for the dollar may not be as strong as last year given that Iran will be sending pilgrims to Saudi Arabia for Hajj, traditionally a key source of dollar demand at this time of the year. Still, the anticipated rise in trade is expected to claim a large share of the upcoming demand for the greenback.
Analysts believe that the price of the dollar will remain between IRR 34,000-35,000. Any figure above this will deteriorate inflation and will accordingly draw an immediate government intervention to calm the market. On the other hand, any rate below IRR 34,000 is unlikely given that market fundamentals are already too strong.