Defying economic gloom, Iran's oil firms propel bourse to record high

By Bozorgmehr Sharafedin and Karin Strohecker

LONDON (Reuters) - The coronavirus crisis, an oil price shock and crippling U.S. sanctions on Iran's energy and banking sectors have brought the country's economy to its knees. Yet the Tehran Stock Exchange is home to one of the top performing equity indexes in the world.

Iran's benchmark TSE index (TEDPIX) has soared 330% since the start of the year in local currency terms thanks to a breathtaking rally in oil firms, refineries and the petrochemical industry - accounting for more than a third of the top 30 companies.

The steep ascent, however, may have little to do with confidence in the country's future. Instead, it mirrors events in Venezuela and Zimbabwe, where indexes have surged more than 400% in local terms amid rising inflation and capital controls.

"Stock market gains in Iran should not be viewed as a signal of economic stabilisation, but rather a reflection of hyperinflation and trapped capital, more akin to Zimbabwe than Russia or Saudi Arabia," said Hasnain Malik, head of equity research at Tellimer.

"Local wealth is seeking a refuge to preserve some of their capital," he added.

The lion's share of the gains comes from energy firms - the main source of foreign exchange revenue for the country, putting the sector in a stronger position compared to others.

The Isfahan Oil Refining Company has roared 500% higher since the start of the year, while Tehran Oil Refining Company is up 450% and Bandar Abbas Oil Refining Company up 250%.

Graphic: Rise of Iran Energy Firms https://graphics.reuters.com/IRAN-STOCKS/xlbvgloewpq/chart.png

The trajectory of Iran's oil stocks seems out of line with international counterparts, with refiners in Asia and North America permanently closing their processing plants due to uncertain prospects for a recovery in fuel demand.

The share prices of U.S. refiners Marathon Petroleum Corp <MPC.N> and HollyFrontier <HFC.N> have halved since the start of the year.

This summer, Tehran planned to sell some of its shares in refineries including Isfahan Refinery, Tehran Refinery and Bandar Abbas Refinery. However, a delay due to disagreements among ministries has caused the stocks to retreat from their record highs in the last two weeks.

"The government does not want to sell its shares cheap," said Arash Safari, a trader at TSE.

By selling part of its shares, the government seeks to raise funds to curb a ballooning budget deficit due to oil sanctions.

Many traders invested their money in the refineries and petrochemicals firms, betting oil exports will rebound one day and oil prices will increase. Some were punting on oil prices - which fell some 30% this year and are currently hovering at $45 per barrel - to bounce back to $70 in the coming months.

"The refineries with more exposure to exports benefited the most from the rise in the stock market and the depreciation of the rial," said an oil and products trader on condition of anonymity.

LOCAL DRIVE

A complicated web of restrictions and sanctions has made Iran's stock market almost exclusively a playing field for local investors. Meanwhile, rising price pressures have spurred more retail investors to plough cash into shares.

"Inflation, or to be more exact expected inflation, is the main factor for the rise of the index of the Tehran Stock Exchange," a TSE spokesperson told Reuters.

"Fortunately or unfortunately, Iran's economy has long faced economic sanctions which intensified in recent years - this has limited the impact of the global economy on the Iranian economy," the TSE added.

Inflation stood at 27% in July, according to Iran's official statistics. The International Monetary Fund predicts it could exceed 34% over the year. Iran's rial currency has weakened 70% against the dollar since Jan. 1.

"A lot of capital that is flowing into the stock exchange is money that otherwise would have been leaving Iran, but now is actually a more difficult time for Iranians to find ways to take their capital abroad," said Esfandyar Batmanghelidj, founder of Bourse & Bazaar, a think tank focused on Iran's economy.

Clerical rulers also encouraged ordinary Iranians to invest in local stocks to boost the country's economy.

While analysts and traders warn of a bubble that could burst, President Hassan Rouhani called the unprecedented rally a sign of economic resilience against the U.S. sanctions.

"They are all angry and say that the stock market is in turmoil all over the world," Rouhani said in April. "Why is the Iranian stock market growing? Iran's stock market is good because of the efforts of all companies and economic activists."

(Reporting by Bozorgmehr Sharafedin and Karin Strohecker; Editing by Mark Potter)