Tehran Stock Exchange: The end of an illusion

Al-Monitor – In an economy besieged by sanctions and handicapped by corruption, the Tehran Stock Exchange offered a rare opportunity for making profits and creating wealth. That opportunity, however, has proved to be a mirage.

From a peak index of 2,065,114, the exchange — known as the TSE — fell to 1,631,941 last week, signaling a 20% drop, erasing millions of dollars of value of different portfolios and financial asset holdings. Iranian investors took to social media to share screenshots of their portfolios with all stocks in the red. Cartoonists found a new subject, while many individual investors mourned the loss of their savings in a market that many had promised to be risk-free.

There is no financial market where volatility is not a daily occurrence. There are ups and downs in any market, with indexes increasing and falling. What makes the TSE different is that its index constantly rose during spring and summer 2020 as Iran’s economy was grappling with the impact of the coronavirus pandemic, and the United States imposed sanctions. The TSE reached 2,065,114 by August, from 520,211 in the previous March. The market quadrupled in its value resulting in some new bizarre realities. For example, the value of Iran Khodro, Iran’s primary vehicle manufacturer producing 393,000 cars annually, became more than Groupe Renault, a French car manufacturer with more than 3.75 million vehicles in annual production and 55.5 billion euros ($65.6 billion) annual revenues. The value of the TSE reached $350 billion, equivalent to 250% of Iran’s gross domestic product.

Many investors interpreted continuous market growth for more than six months as a sign of the TSE being a risk-free market. Investors lined up to buy stocks, and like any other opportunities for wild speculations many became stock market experts overnight, advocating for one portfolio or other. An Iranian stockbroker told Al-Monitor on condition of anonymity, “Sometimes I had  50 investors each with more than 50 billion Iranian rials [roughly $1.2 million] in a queue ready to buy anything I could find for them.” Fifty billion rials is the equivalent of what an average government employee receives in 64 years. The market prices increased, but they did not soar. The Securities and Exchange Organization of Iran has capped market vacillations at 5%.

“Instead of increasing 20% to 25% in a few days, the market kept growing for several weeks,” Sadegh Alhosseini, an economist and former CEO of Iran Insurance Investment Holding Company, told Al-Monitor.

The continuous market growth was the outcome of overregulating it, not a sign of low risk and high returns.

Many macroeconomic factors encouraged the demand for investment in the TSE, increasing the number of small and medium-size investors in the market.  The Iranian government has been borrowing heavily from the Central Bank of Iran (CBI) to cover its growing budget deficit as oil revenues are drying up because of the sanctions. The increase in the government budget deficit has initiated a new inflationary wave, with the point-to-point inflation rate reaching 26%. However, neither the government nor the CBI is willing to float the interest rate or increase it. Iranian banks are lending money at a historically low interest rate of -11%. Although they promise a rate of return of 15% on the deposits, no one would like to keep their savings in the bank as inflation dwarfs the nominal interest rates.

Instead of encouraging caution and promoting transparency, the Rouhani administration pressed to show some achievements in the economy, embracing the growing TSE index for political gain. In June, a confident President Hassan Rouhani told a meeting of the Cabinet, “We must keep a solid and strong stock exchange.” He ordered the minister of economic affairs and finance to be vigilant and to protect the TSE. As the market was approaching its height, Rouhani committed his government to keep the TSE index growing. However, the market was overheating and its regulations had distorted the signaling mechanism. Iranians were investing in a stock market where the government controls the price of the companies’ product, sets the exchange rate for valuing their assets and decides how many shares they can float in the market. The TSE structure had made it vulnerable to any shift in the economic trends.

Many observers and market analysts began to feel uneasy. In June, 25 Iranian economists came together to issue a public warning about the TSE. They reminded all the stakeholders, government officials, regulators and investors that it is not normal for the market to quadruple its value in six months. They highlighted the role of macroeconomic factors in increasing demand for investment in the stock market. They also reminded everyone that the continuous growth in the TSE is due to overregulation and a particular capping system of the TSE. The market trend was not caused by a steadily increasing demand. As the market signals were distorted, they urged the government to allow semi-public companies and banks to increase the supply of shares and securities in the market. They reminded their audience that the TSE had not helped the investment to grow in Iran as the nature of trading has been speculation for higher gains, not for investment spurred by a negative real interest rate. Their demand for increasing interest rates fell on deaf ears. The government officials did not push the semi-public holding companies to increase the supply of shares and stocks. No new initial public offering was offered to the public.

When the TSE began its inevitable fall, the government’s reaction was predictable. Instead of accepting the role of economic factors, it decided to swim upstream to reverse the market trends. SHASTA, Iran’s Social Security Investment Company, intervened to buy stocks from concerned sellers. However, even Iran’s largest holding company did not have enough resources to reverse the tide. After a temporary halt, the TSE index resumes its decline. The government and TSE authorities are still pressing Iranian banks and their holding companies to purchase stock. Failing to increase the supply when the demand was growing now, they are pressuring the demand. However, Iranian banks and their investment businesses do not have the resources to buy shares at price levels, which are 400% more than spring.

As the public becomes disillusioned, the pressure on the government grows to do something. Many who have gained millions of dollars in commission fees and trading costs during the past six months are blaming the government for lack of action and the 25 economists for warning the public. Investors who have lost their savings and assets in their first experience of trading feel betrayed; they hold the government responsible and want to be compensated for their loss. What the government will do in response to the mounting pressure will decide the fate of Iran’s economy. Some fear the recent episode in the TSE market has doomed the economy to become an Iranian version of Venezuela’s economy. For many Iranians that will be a hellish nightmare.