The stock market index, after reaching the level of 72,000 units on June 20th 2016, has experienced an increasing trend with a growth rate of 8% to reach the level of 78,000 units. One of the most important points that grasp the attention in this increasing trend is the different nature of this rise compared to the last rising trend of the index in the aftermath of the Comprehensive Plan of Action. The last growth of the index, with the automobile and parts industry as its leaders, took place in a vague and unclear atmosphere and mostly in response to the news regarding an increase in the capital due to reevaluation and the sale of assets. However, as a result of a more clarified atmosphere surrounding the automobile sector and diminished vagueness surrounding this industry, the intensity of investors’ interest towards this group and also the market was gradually reduced and the index embarked on a decreasing trend.
The growth in the index took place in a new move and influenced by companies that make up the index, an issue that can be examined from two major view points; fundamental elements that source from global markets as well as changes in the parameters that affect the domestic economy. After the British referendum and the voters’ choice to exit the European Union, the global economy became subject to unexpected turbulence, and as result of weakened economies in Europe and England, investors turned increasingly towards Gold and the US Dollar. On the other hand, the growth of the US Dollar used to prevent the Federal Reserve to achieve its objectives regarding the main economic parameters such as GDP, employment rate and inflation. Therefore, the Federal Reserve delayed the increase in interest rate of its economy, bearing in mind the existing risks in the global economy. Moreover, the announcement of the decrease in interest rates by the Central banks of Japan and England as leading world economies, the United States was unwillingly involved in a currency conflict. In addition, the unexpected announcement in the state of employment was another factor leading to the diminished interest of investors towards the US Dollar and their positive approach to investment in global commodities. Since nearly 70 percent of companies that are listed in the stock market are affected directly or indirectly by changes in global commodities including steel and copper, by observing the above mentioned incidents and the investors’ expectations regarding growth in their profitability, interest in the stock of these companies which are mostly those affecting the stock market index was increased, and as a result the index experienced a significant growth due to changes in fundamental elements.
On the other hand, during the above mentioned period, main economic variables in Iran were subject to major change. The rate of inflation as one of the most important economic parameters whose reduction became a key objective of the eleventh government, so that according to reports by the Central Bank of the Islamic Republic of Iran the growth rate of the total index of the price of consumption goods was reduced from 34.7 percent in 1392 to 11.9 percent at the end of 1394. This decline caused a disruption in the growth that companies experienced due to inflation and therefore motivated their management to increase productivity in order to boost their profitability. Moreover, one of the most important outcomes of the reduction in the inflation rate has been the decline in the interest rate for bank deposits. Since holding the office, the eleventh government was aiming at a non-ordered reduction in bank interest rate, as reducing this rate is a chief element in moving the country’s economy and exiting the recession. In this regard, the central bank, bearing in mind the declining trend of inflation and by applying relevant economic policy with the purpose of further participation in interbank market brought the claim of the non-ordered reduction of the bank interest rate closer to reality. Considering the accomplished measures, the interbank rate was changed from 28 percent to nearly 17 percent and the bank interest rate from almost 22 to 25 percent in 1392 to 18 percent at the beginning of 1395. During June and July of 2016 and at a meeting comprised of banks CEOs, an interest rate of 15 percent was approved by all, while in the view of many experts and actives in the banking industry, this rate will reach levels below 14 percent. Considering the lack of essential financial instruments for calculating a risk free interest rate, the bank interest rate have always been viewed as one of the effective criteria in calculating this rate. As a result, such reduction can be considered as one of the most important factors influencing the ratio of no growing price to profit in the direction of the growth of the stock prices in the capital market. Therefore, the ratio of price to profit of the market will be affected considerably and part of the disputed growth can be related to this reduction.
Change in the board of directors of the Securities and Exchange Organization and on the top of it the CEO of this organization has also been effective on the recent increase in the index. During the introduction session, the new director of the SEO, with a positive view regarding the future of the stock market, promised that many of the past difficulties of the capital market will be eliminated. In addition, a flourishing derivatives market, examination of changes in volatility range and the base volume and stimulating hidden potentials in companies were among promises that uplifted the expectations of investors and resulted in an increasing trend in the capital market.
All the points mentioned above can be considered as reasons behind the growth in the capital market; however this market is still facing potential risks which will be addressed below.
Before the elimination of sanctions, capital market analysts believed that the banking sector, considering its 15 percent share in the capital market, will be of great interest to investors after the Comprehensive Plan of Action. Nevertheless, as a result of the high sum of past due claims, high final price of money, heavy claims from the government, locked in assets and the inability of banks to start relationships with international banks, this industry were not of much interest to investors in a way that even holding assemblies for banks after several recesses still remains vague.
Although recently the refining industry has been strongly brought to the attention of investors, it is however still coping with problems emanating from refining and distributing based on quality. Electricity, power plants and technical and engineering industries are still facing problems regarding liquidity and heavy claims. Due to the possibility of the change in the exchange rate to exchange rate unification, Petrochemical industry which has a 30 percent share of the capital market will lose part of its profit that has been identified every year from evaluating the exchange rate. In addition to the refining industry, many other industries that have foreign currency transactions in their operations are also affected by exchange rate unification and the elimination of an official rate for the US Dollar, which will significantly add to the risks of the market. Although mining sector will still profit from the increase in global prices and can develop its operations with the elimination of sanctions, will still have to cope with risks resulting from changes in mining concession and the vagueness that surrounds this issue. The insurance sector, regarding the changes in its provisioning rate might not be able to identify any profit in their financial statements. This is while many in this industry were not able to sharing any profit for their shareholders during this year’s assemblies after much dispute with auditors. In addition to the above mentioned points, most active companies in the Iranian economy cope with problems sourcing from opening lines of credit.
Companies active in the cement industry still face the problem of low demand in both domestic and foreign fronts. Considering the decline in the price of oil, revenue from the sale of country’s petroleum and oil has been considerably affected, which in turn had a significant impact on the country’s development budget which are the leading agents in domestic demand for cement. On the other hand, since the export of cement takes place towards the neighboring countries, they try to protect their domestic producers by levying tariffs on this commodity, which has had a drastic effect on the foreign demand for the domestic production of cement. Mass construction and building companies also cope with locking in of assets due the recession in the construction industry and as can be seen in the market a wave of lay offs has hit construction companies.
Considering all the positive and negative points mentioned earlier, it seems that by acquiring sufficient knowledge regarding essential elements of investment, those active in the capital market will gradually have more contribution and presence in the market despite existing risks.