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The Tehran Stock Exchange – Silently Booming to Record Highs

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The Tehran Stock Exchange (TSE) made headlines this year as its main index, TEDPIX, gained more than 133% since the start of the 2013 on the back of hopes that the new president, Hassan Rouhani, would re-establish ties with the global economy.

The TEDPIX jumped 4.7% on the first trading day after Rouhani was elected on June 14, 2013, with his win renewing hopes that the Iranian economy would soon be reconnected to the world. The TEDPIX has rallied more than 85% since he took power, peaking at an all-time high of 89,501 points on January 5, 2014. TEDPIX is still trading near those levels, and looks set to continue making new records.

The TSE was founded in 1967 with six listed companies and a total market capitalization of IRR (Iranian Rial) 6.2 billion. By 1978, the number of companies listed on the exchange had risen to 105, and its market capitalization had increased to IRR 240 billion.

However, the exchange’s growth was thwarted by the Islamic Revolution and the subsequent invasion of Iran by Iraqi forces. The value of shares traded on the exchange every day declined from a peak of IRR 34.2 billion in the beginning of 1978, to a mere IRR 4.1 billion by the end of the year.

The war with Iraq ended in 1988, after which the Iranian economy started picking up. By 1989, trading volumes at the TSE were recovering rapidly to pre-Revolution levels, and the exchange was admitted as a full member to the International Federation of Stock Exchanges in 1992.

However, following the Islamic Revolution, Iran was subjected to a number of restrictions and varied degrees of economic sanctioning which greatly limited the economy’s growth. The country has the second-largest proven oil reserves in the OPEC bloc, and the eighth-largest proven oil reserves in the world, but due to its limited ties with foreign economies, it has failed to capitalize on its abundant natural resources. The most recent set of sanctions was imposed on the economy in 2006 after it emerged that Iran had started enriching uranium for what it claimed were ‘civilian purposes’.

Due to the trading restrictions, foreign inflows in the country have been negligible, representing only 0.81% of the GDP in 2011. International trading activity has also been restricted, with most of Iran’s cross-border commerce limited to trade with China, the United Arab Emirates and Turkey.

Despite the limited foreign inflows and economic sanctions, however, Iran’s stock market has performed exceptionally well, and the TEDPIX has set new records every year. The number of initial public offerings (IPOs) for companies to be listed on the TSE was six, five, and eight in 2009, 2010, and 2011, respectively. Between March 21, 2009, and March 20, 2010 (year 1388 by the Iranian Calendar), two banks, two insurance companies, a drilling company and a cement producer were listed on the exchange.

The TSE continued its upwards trend through the next year as well, rallying more than 60%. There were five more IPOs during the year, with two insurance companies, one bank, one oil refinery and one steel company offered to the public.

Thereafter, the TSE’s upward march hit brakes, with the main index rallying by a modest 10% in 2011-12. Eight IPOs were completed that year, half of which were for companies from the financial sector, three from the oil and gas sector, and one from the transportation industry. Trading, however, had picked up pace, with the total volume of shares traded that year crossing 73 billion shares, while the total value of stocks traded increased to IRR 226 trillion ($20 billion).

But investors are once again rushing to invest in the Iranian stock market, and the average daily trading volume has risen to 721 million shares, while the average daily value of shares traded has increased to IRR 3.6 trillion ($148.2 million).

The average price-to-earnings multiple of stocks traded on the TEDPIX expanded by 34% to 7.8x in 2013, but the stocks were still trading at a discount of around 34% compared to the MSCI Emerging Markets Index.

The financial sector, which was affected the most by the sanctions imposed by the US, rose more than 120% in 2013, posting the highest increase among all sectors. Oil and gas companies were the second biggest gainers, rising more than 100% in 2013 as prospects for Iranian oil exports brightened.

As the US’s sanctions are gradually lifted, the automobile and pharmaceutical sectors seem to be the ones that will benefit most from the opening up of the Iranian economy.

French carmakers Renault SA (RNSDF) and Peugeot SA (PEUGF) are planning to resume vehicle deliveries in Iran, as the country was one of their biggest markets before it was cut off. The fact that Renault and Peugeot have traditionally been popular brands in Iran will help the French car manufacturers quickly regain their positions in the country.

In 2011, more than a third of the 1.6 million cars bought in Iran were manufactured by Renault and Peugeot. Peugeot alone sold 500,000 cars in Iran in 2011, which included cars it produced in Iran. On the other hand, Renault sold 100,000 cars in Iran that year. It was also forced to leave hundreds of millions of euros in Iranian banks after sanctions were imposed on the country, and will be looking to secure their release as the restrictions on fund transfers are eased.

Pharmaceutical companies had been allowed to continue selling drugs in Iran even after sanctions were imposed, but they had to go through a lengthy and complicated process to ensure that their drugs reached store shelves. It is clear that the government will be more than willing to increase spending on healthcare and medicines as Iranian assets frozen abroad are gradually released. Now that Rouhani is working to open up the economy, and as regulatory oversight is relaxed with the lifting of sanctions, pharmaceuticals will be looking to make a major comeback.

According to the Financial Times, Merck (MRK) is already in talks with a number of Iranian companies to start producing its diabetes drug, Glucophage, and high blood pressure treatment, Concor, in Iran. Other companies like Pfizer (PFE) are waiting until recent dues worth $854,000 are received from the country and the current political leadership’s direction becomes clearer.

If US investors will be allowed to invest in the Iranian stock market, Bidness Etc will have an article out soon on how US investors can have a stake in Iranian companies. Keep checking back for more!

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