Justice Shares, Divestures Saved the Day

EghtesadOnline: The government’s decision to offer its stakes in several companies in the stock market and allow the so-called ‘Justice Shares’ to be tradable saved the bourse from a potential bubble burst, says Saeed Laylaz.

News ID: ۷۵۰۱۸۵

08 June 2020

The well-known economist welcomed both initiatives implying that it came at a right time when unusually large  amounts of liquidity was pouring into the share market pushing up indicators to record highs.

Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei in April approved a government request to transfer the ownership of Justice Shares to the people and remove earlier restrictions on its tradability.

Before the approval, the government had announced a comprehensive divestiture scheme offering its shares in 18 companies via exchange-traded funds in three phases. The first phase began in May with shares in three banks and two insurance companies.

After the unprecedented 200% gain in the last fiscal year  (March 2019-20 ), the Tehran Stock Exchange rallied much higher in the first two months of the current fiscal year (March-May) gaining more than 100%.

Rare gains in the stock market attracted large numbers of investors, mostly novices, and raised concerns about the emergence of a bubble that could burst anytime.  The concerns were premised on the presumption that Iran’s share market was ill prepared for such huge inflows of liquidity.

In a talk with ISNA, Leylaz said gains in the stock market posed “a serious social threat because people, mainly from the lower economic strata, had been tempted to sell valuable assets and rush to the stock market”.

According to Leylaz, this coincided with reports that many big shareholders and key players were moving out of the market anticipating the bubble would burst, jeopardizing the small assets of a million retail investors.

He said the government stepped in at the right time to save the market by offering its remaining shares in banks and insurance firms and allowing holders of Justice Shares to trade them in the stock market.

Leylaz described the government measure as “a right move at the right time”.

Enumerating merits of the government moves, he said: “These measures stabilized the market and saved the bourse from a terrible collapse… a collapse that could have various social and political repercussions.”

Additionally, offering government shares and removing restrictions on trading Justice Share helped in strengthening the stock market and avoiding further fluctuations in macroeconomic variables by absorbing rampant liquidity while allowing the government to secure funds for its budgetary needs.

Lethargic Parallel Markets

Asked why the bourse was embraced by such large numbers of people in recent months,  Laylaz pointed to the impact of the coronavirus on financial markets that  diminished the lure of parallel markets such as gold, currency, auto and real estate.

The compulsory lockdown at home during coronavirus breakout was an opportunity for many people to get acquainted with the share market.

“Given that Iranians observed the lockdown at homes for  two months, they turned to [learning trading] skills via electronic platforms,” he was quoted as saying.

Put simply, the stock market flourished in light of lethargic parallel markets because investors were able to trade without the need for physical presence in the market.

Apart from the downturn in rival financial markets, the senior economist referred to the voluminous liquidity with the public as a much important factor influencing share prices.

Liquidity in Iran climbed to 24,721 trillion rials ($145 billion) at the end of the last fiscal year (March 2020) – up 31% on a year-on-year basis and higher than the average liquidity growth announced by the Central Bank of Iran.

This means 15 trillion rials is added to the money supply every day, Laylaz recalled, adding that in the absence of powerful parallel markets the bulk of the money went into the stock market.

According to the CEO of Securities and Exchange Organization, Hassan Qalibaf-Asl an unprecedented 450 trillion rials ($2.7 billion) in fresh liquidity poured into Iran‘s stock market since the beginning of the fiscal year (March 20) up to mid-May.

During the first phase of government divestiture scheme in May, 58.86 trillion rials ($345 million) worth of ETF units were bought by 3.5 million people, the Ministry of Economy said.

The government’s bank-based ETF holds 17% of shares in Tejarat Bank, 17% in Bank Mellat, 18.32% in Bank Saderat Iran, 17.34% in Alborz Insurance Company and 11.44% in Amin Reinsurance Company.