Following a six month, nearly 400% run-up in dollar terms, the Tehran Stock Exchange is now in bear market territory, down more than 20% in a month, as the Iranian rial trades at record lows on the unofficial market against the ailing greenback vs. more established currencies. During the market boom a record number of new individual trading accounts were opened, with registered investors up 430% y/y through end-August, according to the Finance Ministry.  Many of the new accounts were opened by small investors holding “Justice Shares.” These shares in state-owned companies were distributed for free to low income Iranians nearly a decade ago and in May were released for trading, contributing to massive inflows into the Tehran bourse.  Total investment into the exchange was some USD 24 billion in the first 4 months of the Iranian calendar year (through July 21), sharply higher than the USD 8.33 billion in the corresponding period a year earlier.  With inflation topping 25% and bank deposits earnings only 15%, small savers rushed to share buying.

In response to the market’s drop, parliament pledged to support and stabilize the market. The Social Security Investment Company, which controls many listings, scooped up falling shares as the government and the stock exchange urged state-owned banks and their holding companies to buy stocks.  In addition, the government announced the allocation of 1% of the National Development Fund, the country’s Sovereign Wealth Fund, to the cause. Its liquid reserve position is unclear as the government has used it as a piggy bank since its establishment in 2011, although the IMF last year estimated holdings about USD 90 billion.

Both stocks and bonds feature in the push, and the government has just withdrawn plans to sell oil-backed Islamic debt through its energy exchange, IRENEX, according to state media. Similar to futures, the instrument would have involved pre-sale of barrels of oil to the public.  On the unofficial market the currency has dropped some 50% against the USD this year on the fall in oil prices, continued US sanctions, and the broad economic effects of the pandemic. In response the Central Bank governor tweeted that the economy is “under the most severe pressures” just days after reporting that GDP contracted 2.8% in the March-June quarter but had begun to recover after “the coronavirus shock.” Iran has recorded the most deaths in the MENA region from Covid-19 and is now suffering from a second wave.

In an attempt to buoy the economy, Tehran has boosted trade and investment ties with its biggest trading partner China which needs Iran’s energy supplies and agrees to payments outside the USD system to avoid sanctions. It is also reaching out to formalize economic and security ties with neighbors. Turkey and Iran have announced they will establish a joint economic commission to deepen trade relations using both their national currencies as well as barter, aiming to increase bilateral trade to USD 30 billion.  At the same time, India’s Foreign and Defense Ministers have been in Tehran this month. Iran is already a key source of oil for India, with payments made in local currency.  Deepening bilateral relations are not going to solve Iran’s many economic, financial, currency, and policy troubles, with the rial and stock market retreats likely to accelerate. With no other financial outlet to preserve savings, conventional indicators like P/E ratios 35X signaled overdue correction, and Asian and Mideast foreign investor entry could prove a more commercially-driven near-term stabilizing force.

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