'The banking sector has been hit pretty hard in the stock market, with their problems compounded by the special issue of interest rates,' says Albrecht Frischenschlager, a director of the local Atieh Bahar Consulting. 'It means margins are tight.'

On 24 May, the Tepix all-share index was languishing at 9,502 points, down from 10,083 six months earlier. The index reached an all-time high in August 2004 of 13,882, after an aggressive bull run driven by high oil prices and the closure of other outlets for private investment. However, uncertainty over Iran's political and economic direction before the presidential elections last year prompted a slow bear run, followed by a dramatic loss of confidence when Mahmoud Ahmadinejad was elected president.

Since the election, fears that the West will impose sanctions on Iran have weakened investor sentiment even further. In recent months, the Tepix index has closely reflected shifting sentiment on the nuclear issue. Even record high oil prices have not bolstered confidence, partly because high government spending is not seen as favouring more private sector growth.

As a result, shares are very undervalued. 'The average price/earnings (PE) ratio is about 5.5 now, which is obviously very low for a market like Iran,' says Frischenschlager. 'There are even some good companies that have a PE ratio of just 3 or 4. Everybody is waiting to see if the political situation will be clarified.'

Institutional investors have a much stronger role in the TSE than in many other regional stock markets. Given the sometimes flighty nature of the small investor in a relatively undeveloped market like Iran, this can provide an injection of stability. So far, signs are that the major investors which are all government owned have bought up many of the excess shares in the market. However, analysts say this cannot continue indefinitely.

Meanwhile, the size of the market is actually shrinking, as the process of listing government-owned companies comes to a standstill and some existing TSE companies have delisted. The trend is a direct result of the new government's suspicion of privatisation. It has accused previous governments of selling state companies too cheaply to private opportunists.