Systematic Risks Impeding Stock Market Growth

EghtesadOnline: Bears are dominating the stock market and investment is going other places. The months-long continuation of this trend has analysts hunting for answers.

News ID: ۷۷۷۴۴۷

08 July 2017

According to a prominent economist, political and economic risks bringing about this rout have been in the making for the past few years.

“Iran’s stock market has not witnessed so many political and economic risks in a long time. It is only natural for the benchmark to stop growing,” Morteza Imani-Rad was also quoted as saying by Securities and Exchange News Agency.

Tehran Stock Exchange’s main index TEDPIX has lost more than 2,500 points since late May and shrank to a two-month low. In fact, the market has wiped all it gained on the back of President Hassan Rouhani’s reelection during May 21-23. Things have been downhill ever since, Financial Tribune reported.

Imani-Rad believes the Iranian economy is not yet ready to achieve sustained growth, and consequently, ill-prepared for empowering the stock market. He enumerates five systematic risks causing the situation.

The first risk causing the economic slowdown is of a structural nature, pertaining to the current condition of the banking system and the government’s heavy debt load.

Banks have traditionally been the main driving force in the Iranian economy. However, losses incurred by giant publicly-traded lenders in recent years have hurt the market and the system’s overall weakening has disturbed the capital market’s money supply.

Apart from the banks’ risky adventures, a main cause of their woes is the government’s outstanding and unresolved debt to them accumulated during the 2010 financial crisis.

According to Economy Minister Ali Tayyebnia, the administration’s and public-sector companies’ debts held by contractors and other entities currently stand at a whopping 6-7 quadrillion rials ($152-177 billion).

This makes the government and the banks compete for attracting capital. They both do that by offering unusually high interest rates, one on deposits and the other on bonds. It is only natural that capital would fly away from high-risk equities and lock itself in low-risk markets.

The second risk pertains to domestic policy.

Imani-Rad notes that never before have “political enmities” been so undisguised and venomous in Iran.

“This is the first time that a sitting president is directly attacked by the opposing faction even before he has announced his Cabinet picks,” he said, adding that the unusual nature of this political condition evades prediction and could prolong.

The moderate Rouhani, emboldened by the 24 million votes backing him, has been more vocal about structural and longstanding political and economic issues in his second term. Hardliners, on the other hand, are doing what an opposition is supposed to do, just on a turbo-charged scale. They are picking at anything, ranging from criticizing the details of the nuclear deal to attempting to discredit Rouhani’s doctoral thesis.

The third risk is the political risk in the region. It has exacerbated in recent years because of the rise of the terrorist group IS, increased tensions between Iran and Saudi Arabia, and the escalating wars in Syria and Yemen.

“This is clearly not a good time for the stock market.”

The fourth risk is about the new sanctions imposed on Iran. The deal reached between Iran and world powers back in July 2015 successfully removed sanctions related to Iran’s nuclear program. Yet the US maintains other unrelated sanctions in place, creating impediments to Iran’s path to rejoining the international markets.

The current US administration led by Donald Trump has imposed new sanctions on Iran since coming to power.

The fifth risk involves the threat of rising US inflation rate that would mean a stronger dollar. Coupled with the low commodity prices, the Iranian economy and particularly the stocks could be headed for an even worse bear market.