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The Rise and Fall (and Another Fall) of the Tehran Stock Exchange

November 5, 2020
10 min read
2018 was the most turbulent year in the history of the Tehran Stock Exchange
2018 was the most turbulent year in the history of the Tehran Stock Exchange
In addition to these troublesome monetary, exchange rate and trade policies, the unilateral withdrawal of the United States from the JCPOA added uncertainty to the Iranian economy
In addition to these troublesome monetary, exchange rate and trade policies, the unilateral withdrawal of the United States from the JCPOA added uncertainty to the Iranian economy

Over the last four decades, the Tehran Stock Exchange has experienced many ups and downs, from semi-closure in the first years after the revolution to a stronger period beginning in 1989 coinciding with the country’s first five-year development plan. Over the last two or three years, the situation has been different, and the market’s fluctuations have been shaped by deeply-entrenched financial instability and damage caused by international sanctions. A brief overview of these crucial moments provides a clearer picture of how Iran’s stock market has behaved, and help shape predictions about its future.


Wandering down Hafez Street in Tehran, just where the bridge ends at the intersection of Jomhouri Street, one can often see people rushing in and out of a large building, usually chatting in groups of two or more people, the sounds of their voices fading in and out as they make their way in or out. This is Tehran's Stock Exchange, which has experienced dramatic changes over the last two years.  

Until 2018, Iran’s stockbrokers, the people who make a living following the rise and fall of the market, were somewhat set apart from other people, a distinctive group whose job set them apart, and whose daily work was steady and predictable. Sure, the shareholders they worked with changed in number, and the value of certain stock shifted, growing or shrinking, having an impact on transactions. But the environment was relatively steady and undramatic, and one could often predict these ebbs and flows.


A Year of Change and Turbulence

But in the autumn of 2018, the stock market was transformed. As an article in the Tehran-based Donya-e Eghtesad newspaper reported, 2018 to 2019 was "the most turbulent year in the history of the Tehran Stock Exchange."

The sharp fluctuation of the index coincided with the arrival of large volumes of liquidity, shifting the volume and value of retail transactions. The allocation of 4,200 tomans for the import of certain goods, the establishment of a secondary foreign exchange market, and numerous directives to regulate the foreign exchange market — and consequently, the gold and coin market — had practically destroyed the attractiveness of these markets.

In earlier years, the currency and gold markets were for small profits and speculators. But tired of all the fluctuations, these smaller investors became disenchanted with these markets, leaving the stock market as the only environment for these smaller amounts of capital.

In addition, several other events added to the hardship experienced by people working in Iran's financial industry. These included a shift in the direction of foreign exchange and monetary policies led by a return to a multi-rate foreign currency system, and an insistence on the revival of failed trade policies of previous years, such as foreign exchange contracts and forcing exporters to return their currencies to the country of origin.

In addition to these troublesome monetary, exchange rate, and trade policies, the unilateral withdrawal of the United States from the Joint Comprehensive Plan of Action (JCPOA) added uncertainty to the Iranian economy. Since then, the return of sanctions has exacerbated the turmoil in Iran’s capital market, and these sanctions became worse and more restrictive on a regular basis.

Finally, by the beginning of 2019, the rate of return of the Tehran Stock Exchange was 85 percent and ranked third in the country’s markets after gold and dollar.


Golden Year for Stockbrokers

However, that was the end of a new beginning for the stock market, the so-called "golden year" for the market.

The total index for the stock exchange, which started in April 2019 with 179,000 units, stopped with a range of 512,000 units at the end of the year.

During this period, several records were broken, and politicians slowly began re-focusing on the stock market.

But what was the reason for that particular situation emerging that year? Why were records broken with regard to the overall index, the growth of companies' share prices, the value of transactions, and the number of stock exchange instruments? There were several reasons: the endless growth of liquidity and the constant pumping of money into the roots of Iran's economy; the suppression of parallel markets; expected inflation and foreign exchange rate increases; revaluation of stock market companies' capital with new rates and price changes; and finally, equalizing the stock market with parallel markets that had been at the forefront of growth in previous years.

Of course, it must also be said that the stockbrokers, in addition to enjoying a state of sudden boom, were anxious that this rapid fever would soon break out in a sweat, and the unprofessional bidders who added to the heat of the market would bring catastrophe in less positive times.

It was also significant that the Tehran Stock Exchange appeared to be indifferent to the political turmoil, which was surprising and unexpected. This turmoil included responses to the unprecedented flood at the beginning of the year, the escalation of tensions between Iran and the United States, the bloody protests in November 2019, the assassination of Revolutionary Guards Quds Force Commander Ghasem Soleimani and its aftermath, the downing of the Ukrainian International Airlines passenger plane in January 2020, and Iran being placed on the Financial Action Task Force blacklist. Then, as the Iranian year came to a close in March 2020, the coronavirus pandemic was already taking shape.

Iran’s economic “growth” has been negative for two consecutive years, and some politicians have said the country is currently engaged in an economic war. And yet the capital market continued unabated.

Experts warned that the trend will likely change, and many have recommended that small investors, especially newcomers, purchase with caution and to trade based on value analysis, seeking stock that has intrinsic value.


The Incredible Boom of 2019 and 2020

The trajectory of Iran’s stock market in 2019 was reminiscent of the boom period of 2013 to 2015. The stimulus factors in these two periods had undeniable similarities: foreign exchange rate jumps and rising inflation were two factors that drove the price of listed companies' products up, as well as the growth of the nominal value of companies' shares.

The stock market returns, up to the final two weeks of the year 2019-2020, was higher than 211 percent, but the end-of-year declines eventually reduced the stock market's return to 187 percent, still an unprecedented return.

Numerous political and economic uncertainties were visible on the horizon, and they would all take their toll on the economy, and consequently, the stock market, although people working in these areas did not like talking about these doubts lest they detract from the sweetness of the market boom.

But the unprecedented boom in the capital market meant something else to government officials: the influx of investors who bought every available share tempted the government to fill its financial deficit by selling shares for state-owned companies and offering them on the stock market. This temptation made President Hassan Rouhani and other senior officials with little knowledge of the economy and the stock market to encourage people to invest in government-owned stocks, leading to a growth in the market that topped records on a daily basis.

At the same time, a number of experts and observers warned about the future of this market, believing that the continued insistence by government officials that funds be poured into the stock market did not mean that investment in this market was guaranteed. These experts warned of high costs and dangerous losses.

The way in which shares in government companies were offered to potential buyers also drew criticism: the offers were made in such a way that the companies remained in the hands of the government and therefore negated one of the most important goals behind privatization, namely managerial efficiency.

The liberalization of access to Edalat Shares in the stock market also meant the market welcomed millions of new potential dealers, many of whom hoped to fulfill their economic dreams and make huge profits in the stock market.

This incredible situation continued until August 2020. Few people thought the total index would cross the one million unit mark in spring and make history in the middle of a hot August, passing the two-million units mark.


Correction in the Market or the Turn of a Page?

From that moment onward, the Iran Stock Exchange took a different approach and the market experienced setbacks, which were initially referred to as corrections, but gradually took on the hue of a nightmare.

The same newcomers who rushed to become shareholders and make a profit started wanting a way out. Politicians, who used to invite new guests to the stock exchange table every day, were gradually moving in the opposite direction.

The stock market crash came at a time when Hassan Rouhani's plan to sell oil to the Iranian people, known as the "economic opening," was boycotted by the leaders of the other two branches of power.

These disagreements were revealed in correspondence from the head of the judiciary, Ebrahim Raeesi, and the speaker of parliament, Mohammad Bagher Ghalibaf, to the Supreme Leader Ali Khamenei. Ghalibaf and Raeesi clearly expressed their concerns about Rouhani's plan.

At the same time, there was an inconsistency in the way the Ministries of Oil and Economy offered petrochemical stocks, which was via a First Refining Fund.  Then came the cancellation of this fund, and this signaled the end of the government's full support for the stock market.

These signs were not enough to escalate the downturn in the market. The market stayed buoyant, underpinned by the government's changing policies. The government's focus on selling bonds and forcing banks to buy them shifted the market demand in another direction.

The combination of these factors led to a loss of confidence in the future of the market for many people active in the capital market. At the same time, as prices and indices plummeted, many believed that the intrinsic value of stocks should drive decision-making.

Promises of support for the market and late-night meetings with stock exchange officials and market managers were not effective. This support never materialized, and at the same time these overtures were a sign of serious concern on behalf of the authorities, signs that fomented distrust.

Frequent changes in market regulation, such as fluctuations, downgrades and the like, also raised concerns rather than helping the market.

The forced pricing of some commodities that bolstered industries such as the steel industry, disruption of the supply chain and some companies’ and industries’ production were reflected in the stock exchange, and suggested an abnormal level of uncertainty in policy-making.

Whispers about rising bank interest rates were another factor that sparked doubts and the loss of trust in stocks. This led to the banking system attracting capital and to people keeping deposits in banks.

The government's use of a wide range of means and methods to attract financial resources to provide for its deficit of about 250 trillion tomans [US$8.9 billion] meant that at times contradictory approaches undermined the markets, as one strategy aimed at neutralizing the situation rendered another strategy ineffective.

This extremely unsettled environment, together with increasing rumors of market manipulation and political rivalries rife in the management of markets, as well as news about the destructive role some financial lawyers played in undermining the market  — people who came to be so-called friends of the market but became a burden for the stock exchange — intensified the burgeoning negative market trends.

Meanwhile, the government and political officials were more concerned about supporting the major shares impacting the overall index, turning their back on all other shares.

Investors who were not accustomed to fluctuations and who were unwilling to keep investing in a volatile environment started exiting the market and having an impact on the overall situation.

The stock market is today far from the peak days of August 2020/ There has been no news of a return to figures such as 260 percent,

Such as those seen before, but it is still Iran’s leader in the markets in terms of return. A greater degree of rationality has prevailed in the mindset of shareholders, and many now believe that the number of inherently valuable stocks in the market is not small.

However, numerous internal and external unknown factors continue to add to the uncertainties of the market.

The capital market today, more than ever, must strengthen the institutions and pillars of its foundation. Transparency is also key,  and non-economic intervention from out-of-market channels can double the risk of the recurrence of the post-2013 boom.



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