By Navid Kalhor for Al Monitor. Any opinions expressed here are those of the author and do not necessarily reflect the views of Iraq Business News.
In its 50-year history, the Tehran Stock Exchange (TSE) staged its best performance in the Iranian year beginning March 21, 2013. But by January 2014, it struggled to break or even maintain the record touching 89,500 mark.
The bullish breakout occurred some six months after Hassan Rouhani was elected president for the first time. Now, over 3½ years later, the main index is hovering below 84,000.
High interest rates, global commodity price fluctuations and the country’s dual exchange rate regime are occasionally cited as the major causes of the malaise in the volume and value of trading on the TSE. Yet questionable oversight of listed companies is also a major factor.
Given that interest rates on bank deposits are firmly higher than the inflation rate, there is not much incentive for investors to broadly enter the stock market. On the other side of the coin, payment of high interest rates is a key cost to companies that directly impacts profits. Thus, interest rates affect the level of economic activity, which, in turn, squeezes corporate net margins.
Even more directly, interest rates heat up competition for funds between stocks and bonds. Higher interest rates mean that investors receive a higher return on their fixed-income investments. High bond yields induce investors to sell their stock holdings and invest in more bonds or bank deposits.
High gains from savings accounts and sukuk (Islamic bonds) have thus been one big reason stifling investors’ enthusiasm for considerable stock market participation. This is a long-standing dilemma that hinders sustainable and smooth growth in the equities market for a longer amount of time.
Of note, low liquidity is another malady the stock exchange frequently suffers from in different time periods, particularly before the recent rebound of the TSE. Many financial analysts are of the opinion that low multiples of the money market relative to capital market price to earnings ratio has been the major catalyst behind weak sessions in the stock exchange. This led to a substantially slowed inflow of funds from banking accounts to the TSE.