News Column

Market Overview

August 17, 2014

The Tehran Stock Exchange continued its down- ward trend, which started at the start of 2014, in June. Its index fell by 7 percent during June, making it the worst performing month of 2014. The TSE index has decreased by more than 21 percent from its peak in January 2014, which is now viewed as the fourth bear market of the TSE since its inception.

Historically, the recognition of the entrance of the stock market into a bearish period has led to further decreases in price in the short-term amid negative investors' sentiment. The TSE has experienced recession three times so far and in all of the previous cases, the market experienced accelerating falls in prices. The first bear market occurred between August 1996 and July 1998 when the TSE index fell by 32 percent. The sec- ond one took place between December 2004 and July 2006 during which the TSE index de- creased by 34 percent. At the same time as the global economic crisis was happening, the mar- ket index declined by 38 percent during a nine- month period in 2008. During the previous three bear markets, the TSE experienced a decline of at least 32 percent. Currently the index has dropped more than 21 percent from its height as of June 2014. Having said the above, the market ended the month of June at an average multiple of 5.6, which is below its long-term historical average of 6. As a result of the recent market correction, many companies and sectors have be- come cheap relative to their historical multiples and are expected to attract investments in the coming months.

Even though the main drivers of this recession in the market are the lack of a positive outlook on the growth of profitability of companies and un- certainties regarding the nuclear deal, other factors such as the Iraq crisis contributed to falling prices in June. In the meantime, quarterly reports of companies and results of the nuclear talks are expected to affect the market in July.

Market performance in spring

From a historical point of view, the spring period (from March 21th to June 21th) is concurrent with increasing prices in the stock market. However, in 2014, the TSE index fell by 10 percent during the spring. Taking a closer look at the stock market shows that many sectors suffered large losses. Construction sector shares fell on aver- age by 22 percent which is the record loss of this sector during the spring. Refineries, banks, and petrochemicals, which play a significant role in many investors' portfolios, also experienced an average loss of 10 to 13 percent. The other financialintermediaries sector (leasing companies) and the auto sector were the best performing sectors with growth of approximately 29 and 12 percent respectively. The raising of the leasing interest rate from 15 percent to 22 percent by the Central Bank and the doubling of auto production resulted in the growth of those two sectors. On a macro level, considering the tight monetary policy of the Central Bank and the contractionary fiscal policy of the government, there are no clear signs of how and when economic recovery and positive growth will be achieved.

Sector news

One of the main contributors to the stock market recession in 2014 might be the lack of reliable news regarding a positive outlook of profitability for companies in most sectors. In the biggest sector of the market, namely petrochemicals, the stability of the Rial in regard to foreign currencies in recent months has controlled the main driver of growth in this sector. Furthermore, the global prices of some exported petrochemical products, such as urea and methanol, are at their record- low in recent years. The petrochemical index de- creased by 7 percent in June.

In the mining sector and basic metals sector, the fall in demand from China and the stability of Rial is damaging revenue growth. The global iron ore price has fallen by almost 30 percent, pressuring earnings of Iranian iron ore exporters. Although some of these iron ore companies are working on expansion plans to increase their production capacity, liquidity problems caused by sanctions, devaluation of the Rial and high dividend payout ratio forced by shareholders, has slowed down progress. The index of the metal industries sector declined by 7 percent and that of the mining sector declined 11 percent.

In the cement sector, the Iraq crisis has resulted in an uncertain outlook for the 25 percent of the market of cement producers that export to Iraq. This crisis contributed to the 7 percent drop in the index of this sector. Even the announcement of the 20 percent increase in local cement prices, which is set by government, could not stop the downward trend in stock prices. The cement companies close to the western borders with Iraq experienced a greater decrease in prices than the companies located in eastern and central parts of Iran.

In the pharmaceutical sector, the government did not allow companies to raise prices of their products. However, it is possible for these companies to improve their profitability outlook due to the easing of international trade in this sector. The index of pharmaceutical sector also fell by 11 percent in June.

The low inflation rate (around 15 percent) relative to the one-year deposit interest rates (22 percent) has made it difficult for bank to give high interest loans and banks are in a competition to lower their spread through increasing interest rates on deposits. The average share price in this sector decreased by an average of 8 percent in June.

Despite its promising performance in spring as above, the auto sector had the worst performance among all sectors and its index decreased by 18 percent in June. The 15 percent auto price premium in the free market above the prices set by the government for auto makers has made investors hopeful that the government would allow a price increase soon. However, the government decreed that prices should increase by only 5 to 6 percent on average. Auto makers are unhappy with this decision but the government seems to be unwilling to allow a further price increase.

Market Valuation

After the TSE index went down by more than 21 percent from its peak on January 2014, and after new earnings report and forecast by listed companies were released, the market valuation has decreased substantially. For the first time in the last 15 months, the average P/E ratio of the mar- ket, which reached 8.5 at its peak, decreased to levels of below 6 ending up at 5.6. The average P/E of the market over the last two decades is 6. It can be said that after the recent drop of the market, stock prices have reached reasonable levels and are appropriate as long-term investments. According to the historical data on the TSE, the average annual return of the TSE is 35 percent.

In summary, June was the worst performing month of the market in 2014 with a 7.1 percent fall in the TSE index. Trade values also decreased by 42 percent and stood at $1.8 billion, which shows the current lack of demand in the market.

Market Statistics (June)

Average P/E 5.6

Trade Volume ($ Billion)  1.8

Trade Value Monthly Change (%)  -42

Market Cap ($ Billion) 131

Top 5 Traded by Value (June)

Rank Company Name Turnover Value ($Million) % of Total Turnover

1 Sepahan Oil Co.  93   10

2 Iran Khodro Industrial Group Co. 75  8

3 Saderat Bank 47  5

4 Pasargad Bank 47  5

5 Civil Pension Fund Investment. Co. 38  4

Top 5 Companies by Market Cap (June)

Rank   Company Name   Market Cap ($Million)  % of Total MC

1 Persian Gulf Petrochemical Industry 14,434 11

2 Esfahan's Mobarakeh Steel Co. 5,576   4

3 Bandar Abbas Oil Refining Co. 5,227   4

4 Tamin Oil & Gas & Petrochemical Inv. Co.  4,715     4

5 Iran Telecommunications Co. 4,573    3

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Source: Iran Investment Monthly

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