Market in focus: Iran: Bucking the trend

In a nation with a reputation for going its own way, the Tehran Stock Exchange fits the national stereotype. Unlike other bourses across the region that have plunged in 2007, the Tepix index is enjoying a recovery.

Even in an era of heightened political tensions, the index is gently rising. 'The nuclear issue has been going on for three-four years,' says Ramin Rabii, manager of the Tehran-based Turquoise Fund. 'The market has got used to it.'

The market is offering returns of about 15 per cent. The recovery follows a correction in 2005 and 2006 that wiped 35 per cent off prices. The drop prompted retail investors to flee, leaving more predictable institutional investors. Between 20 and 30 firms now dominate the bourse, which sees average daily trading of only about $15 million. The recent activity of these funds has pushed up share prices.

'Because the market has low liquidity, [institutions] can

put together small share

packages and move the stock and up down,' says Tehran-based Middle East Strategies managing director Albrecht Frischenschlager.

Sanctions still present a risk to companies listed on the bourse. In addition to automotive and cement company stocks that are pillars of the exchange, investors are looking at pharmaceutical issues that many believe will never be hit by international prohibitions. 'If we have fully-fledged sanctions, you can expect a 20-30 per cent drop,' says Rabii. 'However, if there's a deal, there will be a surge of investors on the exchange.'

Another key sector is mining and metals, dominated by zinc companies that have ridden the wave of rising commodity prices. The sector has a market capitalisation of $5,000 million, or 14 per cent of the market.

The sector will expand after the initial public offering of shares in National Iranian Copper Industries Company, due by the end of March. It is one of the country's largest corporations after National Iranian Oil Company and is valued at about $3,500 million. Initially, only 5 per cent of shares will be floated and a further 20 per cent distributed as 'justice shares' to low-income families at no cost. Eventually, the entire company will be listed.

There are also plans to privatise state-owned companies in the telecoms, steel and banking sectors, following a decree issued last year by Ayatollah Ali Khamenei.

Stocks in general are undervalued, trading at an average price/earnings ratio of between 5.5 and 6. Banking stocks are proving to be particularly attractive buys.

There is some interest from foreign investors, despite the current international climate, but restrictions on foreign shareholding mean international investors are limited to a cumulative 10 per cent share in a listed company. A further disincentive is a mandatory three-year lock-in of the principal investment. The bourse will rely on local institutional investors to spur trading for some time to come.