Performance of Iranian equity funds: Smoke and mirrors

Despite growing geopolitical uncertainty and a depressed domestic economy, Iran’s three top-performing equity funds recorded stunning double-digit growth during the last Persian year on the back of the increasing price of commodities and a profitable US dollar exchange rate. However, amid rising regional tensions, US President Donald Trump threatening to walk away from the Iran nuclear deal and a worsening national economic situation, how is the market going to perform this year? MARC ROUSSOT speaks to asset management companies to find out.

The impressive returns of Iran’s top three equity funds may not necessarily be a sign of a healthy domestic economy.

Kian Capital Management’s Avaye Servat and Sabadgardan Aseman’s Aseman Yekom, which recorded the first and third-best performance with 61% and 37.8% returns respectively, mostly benefited from the rising price of oil and steel, and the appreciation of the US dollar against a plummeting Iranian rial, as both funds are mainly invested in commodity and export-driven companies.

“China’s growth resulted in a decrease in steel exports while the demand for steel from emerging markets increased. Other commodity prices were also on the upward trend, in turn, helping the earnings of export companies,” explains Farhang Gharagozlou, an investment manager at Kian Capital Management.

On the whole, the expansion of Iran’s economy, which was expected to grow by 3.5% in 2017 according to the IMF’s projections, contributed very little to the good performance of the equity market, believes Mohsen Motmaen, a development market advisor at Sabadgardan Aseman.

A darker future?
Following the celebration of Nowruz, the Iranian New Year, market players have not shown any kind of enthusiasm as they fear the turbulent times ahead. Looming issues in investors’ minds include uncertainties surrounding the future of the Iran nuclear deal, the war in Syria and the volatility of the Iranian rial, notwithstanding the introduction by the authorities in early April of a fixed rate of IRR42,000 (99.7 US cents) against the US dollar in a bid to steady the ship following the collapse of Iran’s currency to IRR60,000 (US$1.42) against the US dollar.

The Isfahan province, which is home to an important steel industry, is also suffering from an acute shortage of water, a key resource in steel production. Many big Iranian companies, like Esfahan Steel Company which is one of the largest steel companies in Iran, suffer from this shortage, according to Mohsen who added that on the positive side, most analysts expect the price of commodities to increase in the mid-term.

“We anticipate a 30% return for the market this year, but aggressive policies toward Iran mainly from the US, growing tensions between Iran and the Persian Gulf region, sudden and not very well-studied policies introduced to stabilize the exchange rate and Iran’s flawed banking system could impact the performance of the market in a negative way,” details Farhang.

Iran’s financial system is fully Shariah compliant. The Persian year 1396 started on the 21st March 2017 and ended on the 21st March 2018.

This article first appeared in IFN Volume 15 Issue 19 on the 9th of May 2018

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