The Tehran Stock Exchange (TSE) has made a strong start to the year with a surge in both the value and volume of trade.

There were 349 companies listed on the TSE with a total market capitalisation of $67.5bn at the end of March this year, a 7.77 per cent increase from the $62.6bn recorded in the previous month and a 15 per cent increase since January this year.

In the first month of the Iranian calendar year, known as Farvardin which runs from 21 March to 20 April, the TSE All-Share Index gained 13.2 per cent in value and total trade volumes stood at approximately $1.1bn.

“This has been one of the best starts to the year on the Tehran Stock Exchange for probably a decade,” says Ali Mashayekhi, head of investment research at Turquoise Partners, a Tehran-based fund manager.  

“Typically, because this is the first month after the Iranian new year, trade volumes are pretty low,” adds Mashayekhi. “But the TSE saw a record $350m worth of trades in the first eleven days of the year, with more than $50m traded in a single day.”

The strong market performance has been driven by a large inflow of new funds into the equity market. This has happened for two main reasons.

Bank deposits are becoming less attractive after bank interest rates fell from an average of 9 per cent on overnight deposits to 6 per cent in mid-April. This has led investors to move their money from the banking sector to the equity markets.

The slow real estate market is also causing property developers to shift their focus to alternative investments, some of whom have started investing on the TSE.

“Growing interest from the real estate market should lead to an increase in the number of mutual funds going forward,” says Mashayekhi.  

Tehran’s financial regulator, the Securities & Exchange Council, approved the listing of mutual funds on the TSE about two years ago. Today, there are 28 registered mutual funds which range in size from between $1m to $50m.

The second reason is due to the improving health of the global economy which has led to sharp gains in the prices of metals and crude oil, following the weakening of the US dollar.

A lot of the largest companies listed on the TSE are commodity-based, and the exchanges ten largest companies by market capitalisation include a refinery as well as a steel, copper and petrochemicals companies.  

“The rise in the price of commodities and crude oil means the profitability prospects of many listed companies are looking great,” says Mashayekhi.  

“Iranian stocks have become very sensitive to global prices. So if commodity prices move on the London Metal Exchange (LME) today, the TSE has a knee-jerk reaction to it.”

Liquidity is very much concentrated within the 10 biggest stocks – accounting for more than 50 per cent of the exchange’s market capitalisation – and therefore the uptick in these prices bodes extremely well for the TSE.

Trading volumes are set to receive a further boost from the strong pipeline of IPO’s which are expected to come to market this year.

In early April, the Iranian Privatisation Organisation published a list of 90 companies which have been shortlisted for privatisation by 2014, with around 50 of the companies on the list considered high-priority.

The organisation estimates it can raise more than $12bn through these privatisations, although the exact target will not be known until Iran’s budget is ratified. In the previous Iranian year running from March 2009 to March 2010, the country raised $15bn out of its targeted $20bn, a significant achievement given the adverse global economic climate.    

“It seems we’re going to have quite a busy year in terms of privatisation,” says Mashayekhi. “My estimate is that between 10-20 companies will list on the TSE this year, but there could be more if the appetite continues to grow.”

If trading volumes continue at the same pace witnessed to date this year, the TSE will be averaging $1bn in trade a month, an extremely healthy level given prevailing market conditions.