* Equities index soars 18.3 percent in past four weeks
* Auto sector leads, pharma and engineering also strong
* Risks include banking debt, delay to economic reforms
* But valuations still cheap by international standards
* Falling deposit rates may push more money into bourse
By Andrew Torchia
DUBAI, Feb 14 A leap by the Tehran stock market
in the past four weeks contrasts with gloom in many bourses
around the world and hints at Iran's investment potential as its
economy, long isolated by sanctions, rejoins the global trading
The TEDPIX index has soared 18.3 percent since Jan. 16, when
the sanctions were lifted after an international deal on Iran's
nuclear programme. Average daily trading turnover has tripled
from last year to around $150 million.
The economy is still struggling - growth is close to zero,
the jobless rate exceeds 10 percent and many banks face
mountains of bad debt. Political tensions between hardliners and
moderates could slow efforts to address these problems.
As a result, some commentators are warning that the
notoriously volatile market may not hold on to its gains.
"The Tehran bourse is disregarding warnings and the
condition of world markets ... It is going down the same road as
in 2015, the result of which will only be a lack of confidence
and the flight of capital from this market," the conservative
Nassim news agency said in a commentary last week.
But many investors are betting that by restoring Iran's
links with the rest of the world and attracting foreign capital
and technology, the end of sanctions will trigger a long-term
"The actual benefits of the lifting of sanctions will take
six to 12 months to start to feed into companies' financials,"
said Payam Malayeri, head of asset management at Griffon
Capital, a Tehran-based firm which last month launched an
offshore equity fund focused on Iran.
"Investors are discounting that now - they are looking ahead
to corporate earnings growth in 2017 and 2018."
Some economists think Iran's gross domestic product could
grow 5 to 6 percent annually in the next several years. That
would boost corporate earnings 15-25 percent a year, Malayeri
estimated. Also, dividend yields are high at around 12 percent.
So far, auto stocks have led the rally because of prospects
for tie-ups with foreign firms; Iran Khodro, which announced a
50/50 venture to build cars with Peugeot, has rocketed
52 percent. Pharmaceutical and engineering shares have also
surged; banks and petrochemicals have underperformed.
Almost all new buying of stocks has been by local retail
investors. Most foreigners remain cautious and while sending
money into Iran has become easier, full international banking
ties have not yet been restored.
But foreign fund inflows are picking up. Ramin Rabii, chief
executive of Iranian investment group Turquoise Partners, which
manages most foreign portfolio investment on the Tehran
exchange, estimated $10-20 million had entered in the past three
months, bringing the total outstanding near $100 million.
"We may see $100 to $200 million of fresh foreign money in
the next 12 months," Rabii said. That would still be tiny
compared to the market's capitalisation, equivalent to $94
billion at the free market exchange rate, but it would begin to
establish foreign investors as a significant force.
There is plenty of risk. Debts in the banking sector, red
tape and restrictive labour laws may slow any economic boom.
Initially, some companies or sectors could actually suffer
as the lifting of sanctions exposes them to more competition.
Renaissance Capital says steel producers' profit margins may
shrink as imports of cheap metal increase.
Another risk is that reforms to improve the business climate
could be stalled by political feuding between supporters and
conservative opponents of pragmatic President Hassan Rouhani. A
conference in London this month to unveil new Iranian contract
terms for foreign oil companies was cancelled after internal
clashes among officials over the contracts.
In an apparent effort to reassure investors that the uptrend
in equity prices is justified, finance minister Ali Tayyebnia
visited the exchange on Sunday and spoke positively about the
But there are in any case some powerful factors supporting
the bourse's uptrend. Under many ways of valuing stocks, Iranian
equities are still cheap by international standards.
The market is trading at 7-7.5 times this year's projected
corporate earnings - above its long-term average of 6 times, but
well below 11 times for the world's frontier markets, Rabii
said. With Iran now part of the global economy, valuations may
come closer to international levels.
Meanwhile, falling bank deposit rates could push billions of
dollars into stocks, Malayeri said. Deposit rates soared in the
sanctions era, when inflation was high and the rial weak;
authorities have begun guiding them down from above 20 percent.
Rabii said inefficiencies and distortions of the sanctions
era had left pockets of value in the stock market which both
local and foreign investors would exploit in coming years.
"You could buy a cement plant by acquiring a company for a
third of the cost of building one from scratch," he said. "This
is the kind of thing which will attract foreign investment."
(Reporting by Andrew Torchia; Editing by Giles Elgood)