ONEROUND FIVE Years ago, emerging market investors were very excited about the outlook for the Iranian equity market. The lifting of the sanctions in exchange for the limitation of the nuclear program was in sight. Oil exports, Iran’s main source of foreign exchange, would increase and boost the economy. And there was hope that Iran could soon be included in stock indices tracked by global investors. An increase in purchases by foreigners would certainly follow.
Things were different. The sanctions were lifted in 2016 and reinstated by America in 2018. Oil exports have shrunk. Iran had a stock market boom, but it came much later than expected and foreigners played almost no role in it. And it was more of a bubble than a boom. In a few months of this year, share prices soared (see chart).
The bubble has since burst. Since the beginning of August, share prices have fallen by around a quarter and, adjusted for currency effects, many times over. One reason for the hectic share purchase was the Iranians ‘desire to hedge against the rials’ lost purchasing power. Sanctions make keeping dollars offshore quite difficult. It is tempting to conclude that bad things happen when savings are nowhere but in the stock market. However, the history of Iran is more complicated.
Start with the economy. The collapse of oil production after the re-imposition of sanctions caused GDP shrink by around 6% last year. A lack of oil revenues has weighed on public finances and undermined the rial. The Iranian economy offers more than just oil, however, says Maciej Wojtal of Amtelon Capital, a Europe-based fund that invests in Iran. It has a domestic market of 83 million, mostly young people, about the same as Turkey. A number of industries from white goods and automobiles to personal care products and processed foods serve this market. Sanctions have not completely stifled trade. Iran’s neighbors – particularly Iraq and Afghanistan – lack an industrial base, and they import a lot of it. The neighborhood includes Pakistan, Turkey and the UAE. A steadily weaker rial has boosted non-oil export industries like petrochemicals, metals, engineering services, and even chocolate and pastries over time, says Ramin Rabii of Turquoise Partners, a financial services group.
The stock market reflects this industrial diversity. There are hundreds of stocks in different sectors. And because crude oil is a state company, it better reflects the non-oil economy. The market had a good run over the past year, in large part due to the improvement in export earnings. People noticed. This was an asset class that served as a hedge against the loss of value of the rial. The scene was set for this year’s stock price crash.
The trigger was the coronavirus pandemic, which hit Iran particularly hard. The industry stopped. The hard currency became even scarcer. According to Bonbast, who tracks the unofficial foreign exchange market, the rial has lost more than half of its value against the dollar since January. The Iranian central bank flooded the banking system with liquidity to limit the economic damage. Inflation rose to almost 35%. Money soon found its way into asset prices, including stocks. The Iranian government even got part of the revenue from a large amount initial public offering In April. As in America, private investors poured in. The number of people active in the stock market rose from 700,000 to 5 million within a few months, says Rabii.
There are shades of China here in 2015: fear of devaluation; a weak economy; and trapped capital causing a stock market frenzy fueled by the government. That ended badly. But stocks were far from the city’s only hedge in Iran. Real estate prices in Tehran have risen since US sanctions were reinstated, says Rabii. Nearly every hedge against a weaker rial has increased in value, from gold coins to used cars. Others noted an indication of bubble dynamics in hard currencies in Iran. The higher they go, the greater the temptation to keep hoarding them. Scarcity creates scarcity.
For the Iranian government, a stock market boom was the least of the worst ways to raise excess liquidity, says Esfandyar Batmanghelidj of Bourse & Bazaar, a London-based think tank focused on the Iranian economy. True, people who accumulated at their peak are now suffering heavy losses. But a stock market bubble beats one in hard currency, used cars, or real estate, which increases the cost of living. Optimists will point out that China survived its frenzy; The value of its stock markets has just hit a new high.
This article appeared in the Finance & Economics section of the print edition under the heading “Persian Version”.