Financial Markets E1:R7
◢ Iran's capital markets have been competing with attractive bonds for investor liquidity, but dropping inflation rates should bring demand back into the TSE.
◢ As expected, the USD/IRR exchange rate has stabilized around 35,000 as speculation subsides following increased measures by CBI towards rate unification.
Hiccup on the TSE
The TEDPIX fell by 401.5 points to settle at 77,897 points for the week. The general trend for the summer remains positive, with 7% growth, suggesting that the markets remain on an upward trajectory making up for loses in the Spring, at the beginning of the Iranian calendar year. Annual reports as well as the first quarter reports from key firms operating in key industries such as steel, iron ore, refinery, and financial services were more positive than expected. This weeks losses may reflect traders cashing out on recent gains. More importantly, as we head toward the end of the Iranian month of Mordad—the fifth month of the fiscal year—credit deals have to be cleared, and therefore supply would outpace demand.
We expect the stock market to remain positive for the second half of the year, ending March 20, 2017. There have been no signs of major liquidity being injected into the market in the recent past, which to us is a signal that the stock market has been competing with the monetary market for the attention of investors.
Bonds currently offered in the market have an interest rate of around 20%, which is 5% higher than the maximum rate offered by banks on fixed deposits. There is speculation that bond yields could decrease in the coming weeks, as the Central Bank of Iran (CBI) is pushing for further cuts in interest rates. This should push liquidity towards the capital markets.
Construction has struggled in recent years, but we believe that ongoing interest rate cuts could be positive for the sector. The industry may see a rise in demand for housing units in the next year. We also expect the next budget law to provide larger credits for construction projects. We are cautiously optimistic about the industry for the second half of the year.
We are also cautiously optimistic about the cement sector in the coming year as the government has adopted a policy to stimulate demand for cement. Beginning the end of the next Persian month of Sharivar (August 21 – September 20) government stimulus will provide discounts to potential buyers. Meanwhile, if the security situation in neighboring Iraq improves, demand for Iran’s cement will increase.
Mining and Metals
We are keenly watching trends in the Baltic Dry Index (which tracks commodities shipping movements), as it could help forecast future demand. In our view, the index signaling a recovering in key mining and metals commodities. The Baltic index stood at a high of 2,153 points four years ago, but dropped to just 291 points in the recent months. It has since rebounded to 682 points in recent days. In our opinion, upward trends in the Baltic Dry Index signal that similar trends may follow in steel and iron ore demand.
Last week saw IRR 883 billion worth of trades in Islamic Treasury Bills, a decrease of 2% compared to the previous week.
The foreign currency market was relatively stable last week. The USD/IRR rates fluctuated between 35,300 and 35,400, settling at 35,380 by the weekend.
Since CBI Governor Valiollah Seif announced the doubling of dollar reserves in the banks following the official implementation of the Joint Comprehensive Plan of Action and the transferring of frozen assets into the country, speculative activity in the market has reduced significantly. The current fluctuations of the dollar rate against the rial seem to be mostly due to a recent rise in domestic demand as well as volatile currency markets in neighboring countries, especially Turkey.
Meanwhile, the return of banks to the free market seems to be affecting the market in a positive way, as they are boosting the supply side of the FX market. In the last week, a member of the joint state and private banks council announced that the CBI has allowed banks to open letters of credit (LCs) in foreign currencies based on the FX rates announced by bureaus de change.
Demand for foreign currencies is expected to increase in the Iranian month of Shahrivar, as demand for international travel typically increases. Additionally, increasing security concerns in Turkey should see the price of the dollar rise in the coming weeks. However, we expect that the CBI will intervene to stabilize the FX market.