The International Monetary Fund (IMF) said that Iran’s capital market is going ahead without any bubble, indicating that sanctions have no negative impact on Tehran Stock Exchange (TSE).

The IMF in the report entitled “Islamic Republic of Iran: Selected Issues Paper”, presented a rosy view about Iran’s capital market.

The report, which was published in August, announced that sanctions have boosted earnings of several leading listed companies in TSE.

The following is the text of the report:

By April 2011, the Tehran Stock Exchange (TSE) all-share index (TEPIX) had increased 200 percent from its early 2009 low. 

The TEPIX growth was broad-based across sectors. It coincided with a surge in IPOs related to Iran’s privatization program, which allows for 80 percent of state assets to be sold: 40 percent via the distribution of shares to low-income households; 40 percent via IPOs. 

The increase in free float has encouraged trading and developed a shareholding culture, an explicit objective of the government.

The decline in real estate prices and the low real deposit rates have also contributed to increasing the attractiveness of equities as an investment.  

 

Although the price surge between early 2009 and April 2011 has been the largest in any 2-year window over the past ten years, the TSE is not an outlier. China, Egypt, and Saudi Arabia have had price surges up to twice as large as Iran during that period of time. 

Moreover, Iran’s episodes of stock market corrections since 2001 have been the smallest among the comparator countries considered here.

There is also no evidence of a bubble from looking at valuations. Compared with other markets where price/earnings ratios (P/Es) have been in excess of 10, TSE P/Es remain low at around 6, partly reflecting Iran’s frontier market status and international sanctions.

The TSE is also not an outlier when looking at the magnitudes of stock price changes in real terms (CPI-adjusted): real stock prices in April 2011 were still 30 percent below their 2004 peak. 

A more formal assessment of potential price bubble involves comparing real prices to trend. In the recent past, real prices were up to 18 percent above trend, quite below threshold values of 40-50 percent that help predict financial crises at one- to two-year horizons.

There is also no evidence of a bubble form looking at valuations. TSE price/earnings (P/E) ratios have been consistently low. Between 2007 and 2010, TSE P/E ratios ranged between 25 and 44percent of the median of other markets. 

A sectoral analysis of the TSE suggests that sanctions may have boosted earnings of diversified industrials and motor vehicles and parts through import substitution, including through government procurement channeled to domestic producers. 

It is also the case that the fundamentals of basic metals, mining, or petrochemicals have benefited from the surge in global commodity prices. Under-pricing of large government IPOs (Iran Telecom, banks) in the context of the privatization program has also been a supportive factor.