Financial Markets E1:R6
◢ Capital markets are going through a small correction, ending the run that took the TEDPIX index passed 78,000 points
◢ Currency markets have been stable as speculators have reduced their activity in the market
Markets Enter a Short-Run Correction
The TEDPIX declined for the first time in six weeks, ending a run that saw the Tehran Stock Exchange surpass 78,000 points. We believe that the market is currently experiencing a short run correction.
We believe many of the TEDPIX component stocks are nearing major resistance levels and will not see significant growth without new developments. In the coming weeks, it is likely that we will see slower growth, more selling pressure, and corrections. We anticipate that the market will continue to correct downwards until the TEDPIX reaches the 77,000 to 77,500 range.
The current correction may also be the beginning of a period of volatility stemming from investor uncertainly as Iran approaches its next presidential election. While economic reforms continue at a reasonable place, political risk will be priced into the market.
An important ratio here is that between the total market capitalization of the TSE and total liquidity, which stands at the lowest level in 12 years. This ratio averaged 44% in 2005 but is now at 36%. This is while the same ratio had increased to above 90% in 2013 during the height of the TSE’s profitability. This ration should improve once the Central Bank of Iran takes the next step to lower the term-deposit rate to 15%, thereby encouraging capital to move from bank deposits into capital markets.
Banking Sector Poised to Rally
Our analysis indicates that the next rally in the capital markets may be led by growth from banking stocks. After a long tussle, parliament recently approved a proposal to allow the government to clear its debts to banks through a mechanism that would involve exchanging foreign currencies as well as foreign assets. Clause 35 of its budget amendments bill for the current Persian calendar year of 1395 (March 21, 2016-2017) to allocates IRR 450 trillion ($12.8 billion) for the settling of debt with the banking sector. Based on the outstanding claims, Bank Saderat of Iran will receive IRR 25 trillion ($714 million), Bank Tejarat of Iran will receive IRR 35 quadrillion ($1 billion) and Bank Mellat will receive IRR 17 trillion ($485 million) of in loan repayments from the government.
Islamic Treasury Bonds with a total value of around IRR 900 billion (USD 26 million) were sold in debt markets this past week, reflecting a w-o-w decline of 7% in terms of volume.
Currency prices rose 0.3% last week. As the market is approaching the last days of the Persian calendar month of Mordad (July 21 – August 20), market liquidity will decrease along with transactions, resulting in falling prices FX.
The IRR/USD rate has hovered between IRR 3,530 and IRR 3,545 over the past month. It seems increasingly likely that IRR 3,545 represents a ceiling for the rate. We do not anticipate this ceiling to break soon.
Last week, differences in the price of the dollar in Iran’s neighboring markets have pushed the value of the dollar higher. High dollar prices in Afghanistan's Herat as well as the high rate of Dirham-based Hawala are expected to contribute to the dollar’s value in Iran next week, but we do not expect the increase to be particularly significant.
Lower volatility in the market for USD and EUR have led to decreased activity among currency traders. This is especially true of speculative trades that traders use to hoard dollars. Traders who specialize in these trades have been largely absent from the market. This may reflect a changing environment as the government prepares to impose unified rates. The government has needed to make fewer artificial interventions to keep the rate of the dollar down, reflecting a market with stronger fundamentals.