What's Been Happening With the Iranian Stock Market

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1:24Hello and welcome to another episode of the All Thoughts podcast. I'm Tracy Allaway. And I'm Joe Weisenthal. Joe, have you looked at the Tehran Stock Exchange recently? I have not. Let me look that up right now. I know what's going to happen. Oh, nope. I can't find any data for it. Yeah. We have actually recorded. Do you know what happens when you look on the Bloomberg? Do you get a warning? I bet you do. Yeah. So if you look, if you're on the Bloomberg terminal and you want to see what's happening on the Tehran Stock Exchange, you actually get a red bar and it said sanctions may apply to this instrument and you can't get the data.

2:02Yeah, that's exactly right. And we have actually done an episode on Iranian stocks before. And one of the reasons this particular market is interesting is because it has to be the most unfamiliar equity market out there, I think, for the vast majority of investors. Because of sanctions, you can't access data on it. You're not going to see a lot of news stories on what's going on with Iranian stocks. It's just really hard to get a sense at any single point in time of what this market is doing, what it's comprised of, and basically any information on it at all. That's right. It's very strange. It exists.

2:44There are plenty of stocks on it. You know, it's always sort of interesting, I guess, to be reminded that stock markets exist in all these far-flung locations. Iran, of course, is a relatively big middle-income country, but because of the sanctions, it's just so unplugged into the Western financial system, it just doesn't even come up in any conversation. I mean, you hear much more about, say, the Saudi market or something like that. Absolutely. And I'm always kind of surprised when I read the numbers behind how big the Iranian economy actually is, because again, it's just one that people don't really talk about that much, except maybe in the context of oil exports.

3:22But anyway, as I mentioned, we did an episode on the Iranian stock market a couple years ago. And obviously, Iran is back in the news. There's always been a degree of geopolitical risk in this market for obvious reasons. We already mentioned sanctions, but geopolitical risk has just kicked into high gear given the conflict between Israel and Hamas. And so I thought it might be interesting to bring back our guest and just try to take a look at what's happening in this extremely unfamiliar and sort of opaque market. That's right. And obviously, right prior to the start of the war, you know, obviously there had been talk and we talked about this with Gregory Brew, actually.

4:09There had been this easing, not of the sanctions, but it seemed of the enforcement of the sanctions. And so a lot of Iranian oil has been flowing out of the country despite the sanctions. And of course, there was that money that the Biden administration had unfrozen and then since refrozen. And so there had been some macro moves happening in Iran. Whatever trajectory Iran may have been on is probably on something different now. Absolutely. So we are going to be speaking with our previous guest. It's Mache Voital. He is an investor in Iranian stocks. In fact, I think he's the only or he runs the only foreign institutional investor that is actually investing in Iran.

4:53So, again, not a very crowded market and certainly an unusual one. Mache, thank you so much for coming back on All Thoughts. Hi, thank you for having me. So maybe just to begin with, you could sort of give us a reminder of what it is that you and your fund actually do. For listeners who weren't listening to Oblots back in 2020, what's your mandate? Right. So really like a brief description of what we are doing and why we are doing this. So we run an equity fund. It's a proper mutual fund registered in one of the European jurisdictions. And our mandate is to buy stocks listed on the Tehran Stock Exchange.

5:37So Tehran Stock Exchange is the biggest stock market that no one has ever heard of. And it's a proper market. It has around 600 companies listed. More than 50 different industries are present on the market. So it's not a proxy on oil prices. It's around$250 billion market cap and decent liquidity. So if Iran was properly integrated into, you know, global financial markets with no sanctions on it, you know, Iran would be definitely one of the members in MSCI emerging markets indices or would be the biggest member of MSCI frontier markets indices. And but because of all those difficulties that you mentioned related to sanctions mainly and capital controls.

6:28There are no foreign investors there. We got interested back in 2016 when it became legal to start doing anything with Iran. Well, as long as you're not an American investor, Americans still cannot touch the market, but it became legal for everyone else pretty much. But still, you know, half of our work is doing due diligence and actually, you know, working on on operations to make it possible to invest there. But what's interesting why we are doing this is that you mentioned that you were surprised how big Iran's economy is. And I would say that no, it's actually very small comparing to how big it could get because Iran, it's around 90 million people, the largest combined oil and gas reserves in the world.

7:24And they properly developed and diversified economy. Well, thanks to decades of sanctions, they didn't have a choice. They had to develop all different parts of the economy. And all this, in terms of GDP, is around, well, depending how you calculate it, but it's around$200 billion. Now, when you look at Turkey, which is a similar size of the country in terms of population and geographical size, but no natural resources. Turkey is around$800,$900 billion. If you look at Saudi Arabia, which has pretty much no other sectors except for oil and some petrochemicals, the GDP over there is around$1 trillion.

8:12dollars so in some you know super optimistic very very positive scenario if everything went well uh for iran iran could become basically the the combination of the two which is you know anywhere 1.8 to 2 trillion dollars so the upside for the economy um is is you know eight times from where it is right now so this is the potential this is the optionality that is in the market market. And on top of that, once the country starts to open up, obviously there is a long list of things that would have to come in place, then we expect to see a lot of capital flowing into the market. And right now it's only domestic capital and us, which means that because there is not enough capital, the, you know, assets, local assets are valued at very low levels.

9:10So we, what we are seeing in the market is, you know, we are buying stocks at four to five times forward net earnings. Those earnings are growing, they are paying dividends, the average or the median dividend yield, you know, for the top 100 companies is probably close to 15%. So, So, you know, strong double digit dividend yields, valuations at such levels that, you know, they cannot really fall further as long as those earnings are growing. So investment risks are pretty small, pretty limited. You have different sorts of risks. You have geopolitics, exactly as you mentioned. I mean, you know, those those equities basically are priced for war.

9:51And obviously there is a reason that it might be a reason for that because it's because it's the Middle East. And it's amazing how the narrative, you know, the region reminded everyone that, you know, the situation and the perception of the region can make a U-turn overnight. because a month ago it was not only what what you mentioned in the introduction that you know there was some sort of arrangement between Iran and the US which led to the prisoner exchange which which was very important because historically prisoner exchange was usually the first step to something bigger and then on top of that you know Iran is selling a lot of oil so obviously sanctions are probably not enforced very strictly and so on.

10:39But the bigger story a month ago was in the whole Middle East where Iran basically signed a, you can call it a peace treaty with Saudi Arabia after many years of not having diplomatic relations. Then what followed were discussions and restoration of diplomatic ties between Iran and Egypt, Bahrain. all Saudi allies and so on. You know, I obviously want to talk about the trajectory of the country, but to back up for a moment, obviously, the country, as we said in the intro, the country's entire financial system extremely cut off to the point that you can't access the data. Can you talk about how, just remind us, for those who haven't listened to the episode, which I think was late 2019 or early 2020, the mechanics of how you access the Tehran stock exchange from where you are?

11:34Okay, yeah. So look, you have to access the Iran stock exchange website, which actually sometimes you're not able to access it from IPs from outside of Iran. We subscribe to local services, price services like, you know, mini Bloomberg's in Iran that offer a very decent way of, you know, going through the data. So you can not only follow the prices, stock prices, but also it's a good database in a nice format of historical earnings, quarterly earnings, monthly sales data, corporate announcements, charts or different types of charts like price charts, fundamental charts, historical valuations and so on and so forth.

12:22So this is all available in Iran. You have to find those suppliers, subscribe to those services. It's much, much easier if you have people on the ground. So we have an office with three full-time analysts who help with not only research, but also getting things done. Because some things you actually have to do manually there. For example, companies pay very high dividends, dividend yield is very high in the market, but they try not to pay for as long as possible, right? Because interest rates are high, so they try to get this interest for as long as possible. So you actually have to chase them to pay it, right?

13:03You call them, you send faxes, right? Stuff like this. So you need someone on the ground to do it on your behalf.

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14:38Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. Okay, another really basic question on that note. And again, we are unable to access any sort of data. But what has been going on with Iranian stocks recently?

15:16Right. So on 7th of October, I believe that it was the case for the whole region that the currencies, local currencies sold off and local stock markets went down, obviously. What happened was that over the so initially everything went down for the for the first three weeks, the index local equity index measured in dollar terms was going down with the lowest point around 10 percent in terms of the correction. since then it started bouncing back and in local currency terms the equity index is actually at the level from 7th october so it made up for all the losses the currency is still down so from a foreign investor who is measuring you know the pnl in dollar terms you are still roughly three percent down um so so it's actually not that bad uh given you know the circumstances given that the risk for local markets and especially Iran which is involved in everything that is going on the worst case scenario is that potentially there is a military conflict war and I don't know Iranian refineries or petrochemical plants are military targets and so on.

16:37So there was and people were quite scared. We could see this. Some of the sectors went down in the meantime by about 20 % bounced back since then but mainly that was happening due to very low liquidity so what what was the biggest impact actually we could see uh was on on liquidity normal liquidity is around 150 million dollars per day and it went to as low as 30 40 million so what was going down the most is actually the most illiquid stocks or illiquid industries so when when when i look at sectors that really were hit the most. It's textile producers, confectionaries, you know, so things that are not related to war or geopolitics at all, but they are basically illiquid.

17:29And oh, one thing important to remember. So the stock market is driven by retail investors. 90 % of daily trading is done by retail. So, you know, it's very emotional. It's very short-term momentum, I would say. So they are selling or buying depending on the recent price action. So they were driving the share price direction, basically. So when you say performance hasn't been that bad, I'm kind of curious what the basis of comparison is. Because, you know, in a frontier market or an emerging market, if you're looking at, you know, Kuwaiti stocks or something like that, I imagine you would look at the wider benchmark or other members of like the MSCI emerging market index or something like that.

18:18And that would help you gauge relative performance. But for something like Iran, because it's so unusual, it feels difficult to benchmark its performance in one way or another. Yes. And the thing that is most volatile in Iran is the currency. So the stock market is much less volatile in the local currency than when measured in dollar terms. The local stock market is actually well hedged against the currency depreciations because the majority of the biggest companies are actually exporters. So they benefit from currency depreciation, but share prices react with a lag. So for a foreign investor, you initially, usually when something is happening, you usually get hit, see a drawdown due to a big currency, volatile currency move.

19:10And then the stock market usually rallies because, you know, people realize that exporters will start showing better earnings and share price eventually will always, you know, follow EPS. And the lag is because the market is driven by retail. So, you know, in the US, everything would be, you know, any currency move would be priced, you know, real time into share prices of stocks that are sensitive to currency moves, right? And in Iran, it sometimes takes, you know, a month or two months, right? So it's actually a big opportunity that you have time to position yourself correctly. but also what you can compare it with is okay there are two two two interesting facts about the performance of the market um so first of all when i looked at the last 15 years um and big geopolit geopolitical events uh for example like previous uh conflicts in uh with hamas in Gaza.

20:09Or there was a situation between Iran and the US where people were saying that this was close to a military conflict when Iranian General Soleimani was killed and then Iran retaliated by firing some missiles at an American base in Iraq. When I looked at the performance of the market, it never went down more than 10 % in dollar terms, actually. So, so what happened right now, I think the bottom was around 11%, almost 11%, was pretty much in line with those historical geopolitical events that were also, you know, presented a big risk for the local market. But another way of looking at the Iranian market is the historical performance.

20:57And this is very interesting because if you look at the performance on of the benchmark equity index it's called tetpix index total total return for the last 15 years so since the inception in 2018 the annualized return in dollars is around 11 which i think is quite amazing because it's pretty much the same as for S &P 500, maybe 12 % for S &P 500. So it's the same ballpark. And the environment was completely different. I mean, couldn't be more different because over the last 15 years in the US, you had, you know, technology revolution, those mega caps, you know, appearing on the market, interest rates, you know, initially going to zero.

21:46But top of the cycle, you know, margins, of rating margins on top of them, you know, top of the top of the cycle, basically valuations. And in Iran, you had two episodes of currency depreciation of more than 75%. You had some crazy presidents. You had US sanctions, UN sanctions. And still, at the end of the day, when you measure the performance, compare the performance over the last 15 years, it's pretty much the same. obviously with much bigger volatility because you know the in Iran the volatility was probably around 40 percent or something um but but that shows you that um you know when you're buying assets at very very low valuations and I'm say talking about you know there's four times net earnings let's say and the economy and those companies are actually naturally hatched against the currency volatility or big depreciation then um you know even in those countries where where things are going really bad um you can still make money and but what is more important is that if in bad times you were still averaging you know 11 per year you know just think what you can make what you can expect when when you know things finally go the right way for iran and the country opens up and so on.

23:07You know, that's the potential that we are obviously hoping for.

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25:11Learn more at chase.com forward slash business card. Chase for Business. Make more of what's yours. Accounts subject to credit approval, restrictions and limitations apply. Cards are issued by JPMorgan Chase Bank and a member FDIC. Talk to us about perhaps the signs of a thaw in the several months leading up to October 7th between the prisoner exchange, the expanded flow of oil from the perception of a lower enforcement of the sanctions, was that showing up in the market in a clear way? And just to sort of emphasize that further, was there a way to see that in the sectoral breakdown? So for example, if there is more oil flowing out of Iran, or if there was, was that redounding to the benefit of oil-related listed Iranian stocks?

26:01Good question. So the question about oil, the answer is no, because oil is not listed. The only oil-related stock that you can find are local oil refineries that produce petroleum. So they don't benefit from further export. They are correlated to crack spreads because their domestic formula for the price at which they're buying oil from the government is a function of regional crack spread. So nothing to do with it. But there was one instrument that showed perfectly the higher oil sales, is the currency. The currency which I've been talking about that it's so volatile, this year, it's been super stable, around 500 ,000 real per dollar.

26:56and it's been going, oh, I don't know what's the volatility, I haven't checked it, but it's, you know, comparing to the previous couple of years, like nothing is going on with the currency. And this is a clear signal that there are enough reserves that, you know, Central Bank of Iran is accumulating that, you know, the pressure is gone. I mean, it's, you know, it's still very complicated because, you know, bank transfers don't really work or at least not easy with Iran. So whenever Iranian exporters are selling something, whether this is oil or some more formal exports and more transparent exports, very often they don't get the money back to Iran.

27:42It's somewhere there. They get paid to, I don't know, accounts in China or whatever. And it's lying on those accounts. And then money from those accounts can be used to finance imports. But it's not really coming back to Iran. So it's helping because Iran has probably needs to spend roughly$20 billion per year to finance some essential imports. Right. And this is like the minimum amount. If this is missing, then, well, Iran will have to buy dollars at any price. And this is when big depreciations happen. Right. Because they need to buy some food, some pharmaceuticals and so on. So they will buy it at any price.

28:24So when this is covered, then on top of that, you have budget deficit. But this is, again, maybe 10, maybe 15 billion dollars. So altogether, if Iran manages to get 30 to 40 billion dollars per year from oil sales, things are pretty much sorted in terms of stability, in terms of financing imports, in terms of budget deficit and so on. in normal circumstances, you know, countries opened, well integrated with the rest of the world and so on, they will see every month inflow of, you know, several billion dollars that will put pressure actually on the appreciation of the Iranian currency, of the Iranian real.

29:10So yeah, so that's important. So you could see this change last couple of quarters, exactly in the exchange rate. And it's astonishing how volatility went down on the effects. So I take the point about the market itself being influenced by currency movements and things like that. But you already described how the players in Iranian stocks are mostly retail investors. I'm going to assume mostly domestic retail investors too, but you can And correct me if I'm wrong, can you maybe give us a little bit more color about what drives retail sentiment around Iran and inflows? Because I imagine, correct me if I'm wrong, but like to me, it must be kind of a macro story.

29:57But maybe people get excited about individual stocks or the prospects for individual companies. But just give us a little bit more of a sense of what drives that sentiment. Yes. So it's, I think, pretty easy. So it's the dollar, so the exchange rate of the dollar. It's the momentum. So if stocks are showing momentum, then they start chasing momentum. And interest rates, local interest rates. So maybe not central bank interest rates, but whatever the deposit interest rate is. There are several asset classes in Iran for retail investors. So real estate is the big one, the biggest one, but it's a high ticket item.

30:44So not everyone can trade in and out of apartments. It's a well understood asset class as everywhere. That's why it's a bit less interesting for us. So if Iranians have any spare cash, they will buy real estate. From what I heard, 30 % of apartments in Tehran are actually empty. because they are basically used to as a store of value just to park somewhere, assets, savings, and they are not even rented out. They're just empty. And also just bear in mind that in Tehran, in the best places, best neighborhoods of Tehran, prices are quite expensive. So in the north of Tehran, if you want to buy an apartment, you have to pay around$10 ,000 per square meter.