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Iran's bout of irrational
exuberance
By Hooman Peimani
The Tehran Stock Exchange (TSE), recently one of
the world's most torrid performers, has been a source of
government pride since its revitalization in the 1990s.
It has soared upwards by about 80 percent since March.
Now, however, it is fast becoming a reason for concern
as officials attempt to cool things off before it
crashes.
Tehran, it would appear, is in the grip
of irrational exuberance, leaving exchange officials in
a quandary. Last week, the exchange's management, beset
by increasing fears of a popping bubble, stepped in to
forbid brokers to increase prices for two weeks.
However, the unsustainability of such measures is
leading to concern about the possible negative impact on
the Iranian economy.
Last week alone the TSE's
main share index rose by 11 percent. The market's
officials justified the intervention on the theory that
market forces were unable to correct overvaluations
without a crash. That temporarily halted further
increases and produced declines on Tuesday in the share
values of 54 companies and stable prices for 25 others.
On that day the TSE fell by about 4 percent as the
general share price index stood at 9,154.27, down by
399.66 points compared to Monday's close.
At
least three major factors have contributed to the TSE's
impressive gain since early 2003. One has been inward
remittances by Iranians residing abroad, especially in
the United States, of a huge amount of money over a
relatively short period of time, a phenomenon that began
a few months after the September 11 terrorist attacks.
In the absence of any official statistics, the
repatriated amount is estimated at US$7 billion to $15
billion. Added to that is an inflow of Saudi investment
in Iran, an indicator of warming Iranian-Saudi ties.
Last year the repatriation visibly impacted the Iranian
economy through a boost to its construction industry as
well as the equities market. In the second and third
quarters, the TSE's trading volume and share index
increased by 170 percent and 26 percent, respectively.
Another factor has been high oil prices. Unlike
the second half of the 1990s and 2000, oil prices have
been high and more or less stable since 2001. Finally,
the third factor is private investors, large and small,
who have been piling into the market in search of quick
profits. It is a market axiom that when the last of the
retail investors get in, it is time to get out.
One of the problems is that there seem to be few
attractive alternatives to investing in the market.
While Iranian industrial growth has been impressive over
the past two years (about 11 percent this year), various
barriers to industrial activity have discouraged many
private investors. In addition, the low rate of return
on agricultural activity has left only the service
sector and the stock market as attractive investments.
With all the bureaucratic red tape (permits,
regulations, inspections, fees, etc) associated with the
former, high rates of hassle-free return over a short
period of time have attracted many investors.
This availability of a large amount of cash has
contributed to a rapid increase in demand for shares and
has driven share prices through the roof, luring retail
investors with the hope of making significant profits
fairly easily - the elements of a classic bubble.
Tuesday's intervention stopped the upward price
trend, but it did not change the environment. The
artificial capping of share prices has dissuaded many.
However, at the end of the two-week period, the
anticipated resumption of trading will probably put the
TSE back on the roller coaster. That was the situation
that persuaded TSE management to intervene despite its
possible long-term negative impact on investors who
could lose their confidence in a stock market whose
natural performance could now be manipulated by its
management, a scenario with a decreasing profit rate on
their shares.
The return of demand for shares at
the pre-intervention era level will likely cause share
prices to take off again. A crash is possible if the TSE
management declines to intervene yet again. However,
repeated interventions could delay for a while, but not
prevent, the inevitable crash. More optimistic but less
likely, such interventions could give the government
time to create alternative investment opportunities for
those in search of high rates of return. That could
decrease demand for shares and reduce prices.
Yet, either scenario would have a short-run
negative impact on the Iranian economy. A crash would
diminish confidence in the TSE, obviously affecting
negatively all the enterprises and individuals involved
in it. A prevented crash through repeated interventions
would sharply reduce investor confidence in the TSE,
which could lead to the outflow of large amounts of
cash. This would likely not only cut the TSE's
performance but would also lead to a shortage of capital
available for those companies relying on the TSE for at
least part for their capital requirements.
With
the market one of the major factors behind the
significant 7.4 percent annual growth rate, a possible
crash, or a more likely a significant slowdown in
trading for fear of huge losses in the short term would
be a bad sign for Iran's economic performance in 2004.
As an expected lowering of oil prices in that year will
damage another pillar of Iran's economic growth, the
booming construction industry, the third pillar would
unlikely be strong enough to sustain the current Iranian
growth rate even if its impressive performance
continues.
But certainly the reasons responsible
for the ascending price trend are still well in place
and there is concern that prices will take off again
once the moratorium is lifted.
Dr Hooman
Peimani works as an independent consultant with
international organizations in Geneva and does research
in international relations.
(Copyright 2003
Asia Times Online Ltd. All rights reserved. Please
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