Yes! Iran has a stock market in case you did not know. First, lets review Iran’s economic events between 2017 and 2019
2017,2018
After JCPOA(2015), Iran was looking to attract FDI. It was not a success but there was hope and a bright outlook. The country was able to sell oil, yet the problems were brewing.
The economy is a religious topic in Iran.
Other countries devalue their currency to boost their production and flame and blame others for currency manipulation. On the other hand, the currency rate is somewhat religious in Iran. Politicians mock and blame other parties for huge currency devaluations and it is a stain on your resume if there was a currency devaluation during your government. So the politicians love to use all force to hold the currency. The fun fact is they always fail.
After JCPOA, Iran enjoyed low inflation rates (below 10%). But guess the risk free rate for saving accounts during this time… guess it before reading further.
The risk free rate of saving accounts in banks was more than twenty percent! So the real interest rate was more than 10% and it was all risk free! What happened as a result of this? Everyone put money in bank and enjoyed a risk free return that could not be found in any other country. People sold their houses in Canada and put their money in a bank in Iran for this easy gain. And how the banks provided this risk free money to saving accounts? They invested the savings money in their own companies or gave loan to their subsidiaries and sibling companies and they borrowed from central bank when they lacked resources. This could not go long.
Enters: Trump
Trump got elected, threatened to withdraw from JCPOA and bring back sanctions. This caused panic, but not for public. Trump’s threats became more serious and it caused huge outflows from the country. And guess what, the government loved to hold the currency and it did. But with what resources? Central Bank.
But Central Bank’s resource is limited and Its means of manipulating the currency also became limited (central bank used dealers to inject USD and manipulate the market. but the dealers were arrested). So over time, the currency plunged. It was changing day by day, hour by hour. Trump was not the only cause. But it was a trigger.
When you are sick, you go to doctor. But in Iran, when there are economic problems, no one listens to economists! So the politicians thought they are the hero of the story and decided to set the currency rate, manually. The government took these decisions:
- The USD/IRR is a fixed rate (4200 USD/IRR)
- This rate (4200) is proposed and calculated by economists (which was a lie)
- This rate is available for everyone and we provide it (again, a lie)
- Holding USD as cash is illegal
- The government would decide who can import what at the said rate(which caused a lot of economic rent)
In the black market, currency rate went higher and higher. and it reached the top of around 20,000. But came down about 9,000-11,000. The government blamed the speculators and dealers for currency plunge. They said those who buy USD will be burned and government arrested many people. They executed many of these dealers(King of Coin, King of Sugar, etc. because they traded or hoarded that commodity)
At the time, I thought this was something novel and no one behaves like this. Yet after reading a lot, specially Ray Dalio’s book, I learned that this case was “another one of those”.
I quote from Principles book of Ray about the time of Nixon (Bolded parts are those that happened exactly in Iran):
I heard our government officials pooh-pooh the worries about the dollar and the excitement about gold, assuring us that the dollar was sound and that gold was just an archaic metal. Speculators were behind the rising gold prices, they said, and they would get burned once things settled down. Back then, I still assumed that government officials were honest…
Ray Dalio, Principles
President Nixon went on television to announce that the U.S. would renege on its promise to allow dollars to be turned in for gold, which led the dollar to plummet. Since government officials had promised not to devalue the dollar, I listened with amazement as he spoke. Instead of addressing the fundamental problems behind the pressure on the dollar, he continued to blame speculators, crafting his words to make it sound like he was moving to support the dollar while his actions were doing just the opposite. “Floating it,” as Nixon was doing, and then letting it sink like a stone, looked a lot like a lie to me. Over the decades since, I’ve repeatedly seen policymakers deliver such assurances immediately before currency devaluations, so I learned not to believe government policymakers when they assure you that they won’t let a currency devaluation happen.
The more strongly they make those assurances, the more desperate the situation probably is, so the more likely it is that a devaluation will take place.
Back to Stock Market. What happened as a result in stock market?
People first believed it when government declared that the currency rate should be 4200 when it was about 6000 in the free/black market. And the stock market tanked. But after it was clear that the government lied and the rate became stable about 10,000, the stock market adjusted accordingly. First those stocks rosed which had exportable products. Then others because of assets, inflation, replacement value, etc. The government had to withdraw from 4200 rate later. But there were two rates, official rate and free/black market rate.
At the end of fiscal year, currency rate was about 12,000 USD/IRR and official rate was about 10,000. The companies average export currency rate was about 7,000 USD/IRR. This was because they suffered the government rate of 4,200 for 7 months and they exported at a rate of 11,000 for 5 months. hence the 7,000 average for year.
This was the end of 2018 fiscal year and the stock market had doubled. The index went from about 90,000 to 200,000 in a year. If you looked at financial statements, stock prices were adjusted with 7,000 while the market rate was about 12,000. So another bull market was expected.
2019
As I said above, at the end of 2018 fiscal year, stocks were adjusted with 7,000 currency rate while the market rate was about 12,000. So another bull market was expected. But some interesting things happened. Many people in Iran knew nothing about stock market. They bought house, lands, gold and USD to protect their wealth from inflation. In the past decade, people got rich in building and construction sector (probably mostly because of dutch disease.). So stock market was for a small community of traders and investors. Most of them finance people and/or institutional investors.
Enters: Everyone!
The count of people directly trading in the stock market can be measured by active trading accounts. This number shot up from 300,000 to about 2,000,000 active accounts in 2019! So everywhere you saw people trading the market and suggesting stock picks to each other. So imagine 1.7 Million people flock to market with money, knowing little about finance and business. Instagram and Telegram celebrities became the kings of market manipulation.
Furthermore, was another factor in play. When considering options for people to store their wealth:
- House: increases the price of housing which is already very high
- UDS/Gold/etc.: this further pressures the currency and the government does not want that
- stock market: possibly good solution
The government also incentivized people to invest in the market. It did not take a genius to know that government wanted people flock to stock market.
A tomato paste maker company advertised on national tv and said “Invest in Stock Market”. Why would a company pay to advertise stock market on television? Anyway… .This huge bulk of money flocking to market caused a sharp bull market. In 2019 fiscal year, the stock market index went from 200,000 to 550,000.
So about the title of 100x return, I turned 5M to 500M IRR. how? derivatives. And yes again, there are derivatives in Iran’s stock market too. Nothing clever. If you know the trend of stock market, you can easily use leverage. Be it borrowing, broker loans or derivatives. But derivatives usually provide a better risk profile.
* if you consider USD adjusted, it is about 65x in dollar terms, not 100x.
The fact is that many players in Iran’s stock market are not experts. And experts do not control major share of the money. So if you have a small edge which is not hard in such a low competition environment, you win easy.
Furthermore, international investors cannot participate because of all sorts of risk and limits like sanctions, politics, government, currency, etc. But there are few people who had the courage to come and invest in Iran’s public market during turbulent times and made good returns.
Final thoughts
I think that as long as you can surpass the policy makers and politicians just by reading a basic book on Economics, there would be lots of inefficiencies(/opportunities) and economic rents in Iran.
