What's Been Happening With the Iranian Stock Market

Iranian stocks. It's just really hard to get a sense at any single point in time of what this market is doing, what it's comprised of, and basically any information on it at all.

We already mentioned sanctions, but geopolitical risk has just kicked into high gear given the conflict between Israel and Hamas, and so I thought it might be interesting to bring back our guest and just try to take a look at what's happening in this extremely unfamiliar and sort of opaque market.

and so there had been some macro moves happening around. Whatever trajectory Iran may have been on is probably on something different now.

a proxy on oil prices. It's around two hundred and fifty billion dollar market cup and this decent liquidity. So if Iran was properly integrated into you know, global financial markets with no sanctions on it, you know, Iran would be definitely one of the members in MSCI Emerging Markets in this is or would be the biggest member of MSA frontier markets. And this is but because of all those difficulties that you mentioned related to sanctions mainly and

capital controls, there are no foreign investors there. We got interested back in twenty sixteen when it became legal to start doing anything with your run. Well, as long as you're not an American investor. Americans still cannot touch the market, but it became legal for everyone else pretty much. But still, you know, half of our work is doing due diligence and actually you know, working on operations to to make

it possible to investor. But you know, what's what's interesting, why why we are doing this is that you know, you mentioned that it's that that you were surprised how big Iran's economy is, and I would say that that, no, it's actually very small comparing to how big it could get because he ran. You know, it's around ninety million people, the largest combined oil and gas reserves in the world, and they properly developed and diversified economy well thanks to

decades of sanctions, they didn't have a choice. They had to, you know, develop all different parts of the economy. And all this in terms of GDP is around well, depending how you calculated, but it's around two hundred billion dollars. Now, when you look at Turkey, which is a similar size of the country in terms of population and geographical size, but no natural resources, Turkey is around eight hundred nine

hundred billion dollars. If you look at Saudi Arabia, which has no other pretty much no other sectors except for you know, oil and some petrochemicals, the GDP over there is around one trillion dollars. So in some you know, super optimistic, very very positive scenario, if everything went well for Iran, Iran could become basically the combination of the two, which is, you know, anywhere one point eight to two trillion dollars. So the upside for the economy is you know,

eight times from where it is right now. So this is the potential, This is the optionality that is in the market. And on top of that, once the country starts to open up, obviously there is a long list of things that would have to you know, come in place. Then we expect to see a lot of capital flowing into the market. And right now it's only domestic capital and us which means that because there is not enough capital, the you know, access local assets are valued at very

low levels. So we what we are seeing in the market is, you know, we're buying stocks four to five times forward net earnings. Those earnings are growing, they are paying dividends. The average or the medium dividend field you know for the top one hundred companies is probably close to fifteen percent, so you know, strong double digit dividend fields. Valuations at such levels that you know, they cannot really fall further as long as those earnings are growing. So

investment risks are pretty small, pretty limited. You have different sorts of risks. You have geopolitics exactly as you mentioned. I mean, you know, those those equities basically are priced for war, and obviously there is a reason. There might be a reason for that, because it's because it's the

Middle East. And it's amazing how the how the narrative you know, the region reminded everyone that you know that the situation and the and the perception of the region can can make a U turn overnight, because a month ago it was not only what you mentioned in the introduction that you know, there was some sort of arrangement between Iran and the US which led to the prisoner exchange, which which was very important because historically prisoner exchange was

usually the first step to something bigger. And then on top of that, you know, Iran is selling a lot of oil, so obviously sanctions are probably you know, not enforced very very strictly and so on. But the bigger story a month ago was in the whole Middle East where Iran basically signed a you know, you can call it the peace treaty with Saudi Arabia after many years

of not having the promoting relations. Then what followed were you know, discussions and restoration of diplomatic ties with between Iran and you know, Age of Bukrain, all Saudi Saudi allies.

access it from IPS from outside of Iran. We subscribe to local services price services like you know Mini Bloomberg's in Iran that offer a very decent the way of you know, going through the data so you can not only you cannot not only follow the prices stock prices, but also it's a good database in a nice format of historical earnings, quarterly earnings, monthly sales data, corporated announcements, charts or different types of charts like price charts, fundamental charts,

historical valuations and so on and so forth. So this is all available in Iran. You have to you know, find those you know, those suppliers, subscribe to those services. It's much much easier if you have people on the ground. So we had an office with free full time analysts who you know, who help with not only you know, research, but also getting things done because you know, some things you actually have to do manually. There. For example, companies

paid very high dividends. Dividend yieldy is very high in the market, but they try not to pay for as long as possible, right because interest rates are high, so they try to get this you know, interest for as long as possible, so you actually have to chase them to pay it, right, you call them, you send faxes, right, stuff like that. So it's you need someone on the ground to do it on your behalf.

In local currency terms, the equity indexes actually at the level from seventh October, so it made up for all the losses. The currency is still down, so from a foreign investor who is measuring you know, the P and L in dollar terms, you are still roughly three percent down, so it's actually not that bad given you know, the circumstances. Given that the risk for local markets and especially Iran,

which is involved in everything that is going on. You know, the worst case scenario is that potentially there is a military conflict war and I don't know Iranian refineries or petro chemical plants or military targets and so on. So there was and people were quite scared. We could see this. Some of the sectors went down in the meantime for by about twenty percent, bounced back since then, but mainly

there was happening due to very low liquidity. What was the biggest impact actually we could see was on liquidity. Normal liquidity is around one hundred and fifty million dollars per day, and it went to as low as thirty forty million. So what was going down the most is actually the most ill liquid stocks or ill liquid industries.

So when I when I look at sectors that really were hit the most, it's textile producers, confectioneries, you know, so think they're not related to war or geopolitics at all, but they are basically in liquid. And one thing important to remember, so the stock market is driven by retail investors.

Ninety percent of daily trading is done by retail, so you know it's very emotional, it's very short term momentum, I would say, so they are selling or buying depending on the recent price action, so they were driving the share price direction basically.

relative performance. But for something like Iran, because it's so unusual, it feels difficult to benchmark its performance in one way or another.

foreign investor, you initially usually when something is happening. You usually get hit see a drawdown due to a big currency volatile currency move, and then the stock market usually rallies because you know, people realize that exporters will start showing better earnings and when share price eventually will always you know, follow EPs and the lag is is because

the market is driven by retail. So you know, in the US everything would be you know, any currency move would be priced you know, real time into share prices of stock that are sensitive to currency moves, right, and in Iran sometimes takes you know a month for two months, right, So it's actually a big opportunity that you have time to to to position yourself correctly. But also what you can compare it with is okay, there are two two

two interesting facts about the performance of the market. So, first of all, when I looked at the last fifteen years and big geopolitical events for example, like previous conflicts with Hamas in Gaza, or there was a situation between Iran and the US where people were saying that this was close to a military conflict when Iranian General Solimani was killed and then Iran retaliated by firing some missiles

at a American base in Iraq. When I looked at the performance of the market, it never went down more than ten percent in dollar terms. Actually, so what happened right now, I think the bottom was around almost eleven percent, was pretty much in line with those historical geopolitical events that were also presented a big risk for the local market.

But another way of looking at the Iranian market is the historical performance, and this is very interesting because if you look at the performance of the benchmark equity index it's called ted Picks Index, total total return for the last fifteen years, so since the inception in twenty eighteen, the annualized return in dollars is around eleven percent, which I think is quite amazing because it's pretty much the same as for S and P five hundred, maybe maybe

twelve percent for S five hundred, So it's the same ballpark, and the environment was completely different, I mean, couldn't be more different, because over that over the last fifteen years in the US, you had you know, technology revolution, those mega apps you know, appearing on the market, interest rates you know initially going to zero, the top of the cycle, you know, margins operating margins on top of them, you know,

top of the top of the cycle basically evaluations. And in Iran you had two episodes of currency depreciation of more than seventy five percent, you had some some crazy presidents, you had US sanctions un sanctions, and still at the end of the day, when you measure the performance, compare the performance over the last fifteen years, it's pretty much the same, obviously with much bigger volatility, because you know, the in Iran the volatility was probably around forty percent

or something. But that shows you that, you know, when you're buying assets had very very low valuations, and I say talking about you know, there's four times net earnings, let's say, and the economy and those companies are actually naturally hatched against the currency volatility or big depreciation. Then you know, even in those countries where things are going

really bad, you can still make money. But what is more important is that if in bed times you were still averaging, you know, eleven percent per year, you know, just think what you can make, what you can expect when when you know things finally go the right way for Iran and the country opens up and so on, you know, that's that's that's the potential that we are obviously hoping for her.

way to see that in the sectoral breakdown? So for example, if there is more oil flowing out of Iran or if there was, was that redounding to the benefit of oil related listed Iranian stocks?

that showed perfectly higher oil sales is the currency. The currency which I've been talking about that it's so volatile this year, it's been it's been super stable, around five hundred thousand real per dollar, and it's been going, Oh, I don't know what's the volatility, volatility, having checked it, but it's you know, comparing to the previous couple of years, like nothing is going on with the currency, and this is and this is this is a clear signal that

there are enough reserves that you know, Central Bank of Iran is accumulating that you know, the pressure is gone. I mean, it's you know, it's still very complicated because you know, bank transfers don't really work or at least not easy with with Iran. So whenever Iran and exporters are selling something, whether this is oil or some more formal exports and more transparent exports, very often they don't get the money back to Iran. It's it's it's somewhere there.

They get paid to I don't know, accounts in China or whatever, and it's and it's lying on those accounts and then money from those accounts can be used to find and imports, but it's not really coming back to Iran. So it's helping because Iran has probably needs to spend roughly twenty billion dollars per year to finance some essential imports, right, and this is and this is this is like the minimum amount. If this is missing, then well Iran will

have to buy dollars at any price. And this is and this is when big depreciations happen, right, because they need to buy some food, some some pharmaceuticals and so on, so they will buy that any price. So when this is covered, then on top of that you have budget deficit. But this is again maybe ten, maybe fifteen billion billion dollars.

So altogether, if Iran manages to get thirty to forty billion dollars per year from oil sales, things are pretty much sorted in terms of steadility, in terms of financing imports, in terms of you know, budget deficit and so one. In normal circumstances, you know, countries opened well integrated with the rest of the world and so on, they will see every month inflow of you know, several billion dollars that will put pressure actually on the on the appreciation

of the Iranan currency, of the Iranan reality. So yeah, so that's that's that's important. So you could see this change the last couple of quarters exactly in the exchange rate, and it's and it's astonishing, how you know, how volatility went down on the effects.

you can correct me if I'm wrong. Can you maybe give us a little bit more color about what drives retail sentiment around Iran and inflows, because I imagine and correct me if I'm wrong, but like to me, it must be kind of a macro story, but maybe people get excited about individual stocks or the prospects for individual companies, But just give us a little bit more of a sense of what drives that sentiment.

the deposit interest rate is. If there are several asset classes in Iran for retail investors, so real estate is the big one, the biggest one, but it's a you know, high ticket item, so not everyone can trade in and out of apartments. It's it's a well understood asset class as everywhere. Is why it's it's it's a bit you know, less interesting for us. So if Uranus have any spare cash,

they will buy real estate. From what I heard, thirty percent of apartments in Tehran are actually empty because they are basically used to as a store of value, just to park somewhere, you know, assets savings, and they're not even rented out, they're just empty. And also just bear in mind that in Tehran, in the best places, best

neighborhoods of Tehran, prices are quite expensive. So in the north of Tehran, if you want to buy an apartment, you have to pay around ten thousand dollars per squaremeter, so you know, a hundred scarameter of apartment, I don't know, three bedrooms will cost you, you know, a million dollars or something. Right in Iran, which which is which is a poor country, So this is real estate. Real estate is number one asset class. A very important class are

used cars. So people trade use cars because they they they are again a hedge against inflation, against the currency depreciation because carrent manufacturers will always adjust prices based on inflation. Some of them have to be some of the components have to be imported, which is not easy. So you know, they produce more than one million cars, are actually closer probably to to one point five million cars per year, but this is not enough, so the demand is much higher.

So they're trading used cars and their platforms that help you trade use cars. It's a it's a it's a proper asset class. And yes, and every iranium is actually a currency trader because because you know the currency has been so volatile historically that it's very important that you know what's happening to the to the dollar right or to the local currency you know against the dollar. So everyone is tracking, you know, the exchange rates. And it's not easy to buy and sell dollars. There are quotas

for you know, individual Uranians due to capital controls. So that's why instead of buying dollars or to buy or to get a bigger position, they go to those proxy asset classes like used cars or of real estate and also interest rates so you can buy sell treasure rebels, treasury reviews up to you know, two years maturity. They they pay around twenty five percent. YouTube maturity may be a bit more right now. So, so interest rates are high.

And that's another thing. Look when you when you when you look at Iran, there is not enough capital there. There's basically not enough money, not enough credit doesn't exist. I mean you cannot get a mortgage at you know, twenty five percent, right, I mean you cannot finance anything at twenty five percent. And because of very volatile metro, people also tend to you know, postpone investment decisions, whether

these are individuals or more importantly companies. Right, everyone is looking like six months ahead, maybe twelve months ahead, right, and managing managing a crisis, because there is always some sort of crisis. Right, So when you think about it, for example, I don't know, every company is running big inventories just in case, just so that they have enough you know, material to manufacture their products. So they are not optimized organized in this very efficient, you know leaning

way they are. They are organized, you know, just to survive, survive basically you know, war conflicte, currency depreciation, sanctions, trade disruptions.

in the economy. I used to call it China's Great Ball of Money because of capital controls, and I imagine maybe there's a similar issue in Iran where there's not enough capital but there's a lot of domestic savings that are sort of are unable to get outside of the Iranian economy. Is that the right way to think of it?

heard manufacturing, they haven't heard exports companies that much. To be honest, I mean, because you know, people find the way I mean companies that exports in the region, they are not really affected by sanctions, big exporters that used to send you know, products to Japan and so one, yes, they were affected, but they found other roots and manufacturers.

You know, sanctions cost one thing. I mean, sanctions caused the currency volatility, so the big depreciations of real and manufacturers who have costs in real but they either sell in heart currency or at prices linked to some regional benchmarks that are in heart currency, their margins actually expanded. Look, it's an interesting thing that the highest earnings growth that we've seen over the last couple of years was one

year after the twenty eighteen sanctions. This is crazy because this is you know, not not as intended I would assume, right, and and who got hurt by sanctions, Well, households because they are price takers. So when the inflation shot up because of the currency depreciation, they their spending power went down massively, right and and and and and they and and they were able to survive. And it was actually

quite interesting that they were holding up quite well. And this is because of those savings, right, of the high high savings that Iranian households had I'm not sure what's the situation right now, because they've been I think, you know, on a net basis, those savings have been have been decreasing over the last couple of years because they had just had to spend them. But yes, that's that's what helped them, you know, survive the the inflation.

But could it be that that never happens, and that the future is just a much bigger, sort of Chinese centric sphere of financial influence in the region, exports across Afghanistan, more trade with Russia, and that Iran Iranian companies end up benefiting from the emergence of a basically separate you know,

people talk about the bricks for the deglobalization. Yeah, yeah, that basically instead of it one day becoming plugging more into Western financial system that it never does that, it just plugs into another large emerging financial system to the benefit of Iranian companies.

But on the other hand, it means that you know, it's not isolated there right, that the country is welcome and will be part of those you know, potentially different systems, which can be I don't know, financial systems or economic ecosystems. So yes, absolutely this is happening. However, there is another big factor that will be driving Iran's direction in the future,

and it's the population. It's demographics. Look, ninety million people live in Iran and two thirds of them were born after the revolution in seventy nine, so they can't really relate to any revolutionary slogans. They have their own, like you know, vision for the country idea. They basically have their own vision of their lifestyle that they want to have. Right and and this is the same trend that is happening in other countries like Soudi Arabia, and Soudi Arabia

is liberalizing a lot of areas of life. And you know, it's a very good decision. But I but I think that actually they don't have any other choice because you know, whichever country we're talking about, the local regime, the local government you know, at the end of the day, wants to stay in power, right, so they need to adjust to to basically have you know, their population happy and accept the states quo in terms of you know, the

power and the regime and so on. So they have to change and and and and this this, this is driving countries. I mean the same with you know, protests that you could see at the beginning of the year in in Iran, women protests. This is all changing the country, even if it's not like visible immediately, it's it's it's it's a massive force. And I think this will also affect the direction of the country.

various geopolitical forces and sanctions and many unexpected things. The idea that there is this sort of beginning of increased relationships, maybe just pull it go so far, so far, but plugging into China and the bricks, et cetera, and maybe it just never happens that. I thought it was a very interesting conversation.

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