The EconomistOctober 17th 2020 Finance & economics 652
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round fiveyears ago emerging-
market investors were greatly excit-
ed by the prospects for Iran’s stockmark-
et. The lifting of sanctions in exchange
for limits on its nuclear programme was
in sight. Exports of oil, Iran’s main
source of foreign currency, would in-
crease, boosting the economy. And there
was the hope that Iran might soon be
included in equity indices tracked by
global investors. A surge of buying by
foreigners would surely follow.
Things turned out rather differently.
Sanctions were lifted in 2016, only to be
reimposed by America in 2018. Oil ex-
ports have dwindled. Iran did have a
stockmarket boom, but it came much
later than anyone had expected and
foreigners played almost no part in it.
And it was more bubble than boom. In a
few short months this year, share prices
rocketed (see chart).
The bubble has since popped. Share
prices have fallen by around a quarter
since early August and by a lot more in
hard-currency terms. One rationale for
the frantic stock-buying was Iranians’
desire to hedge against the lost purchas-
ing power of the rial; sanctions make
holding dollars offshore rather tricky. It
is tempting to conclude that bad things
happen when savings have nowhere else
to go but the stockmarket. But Iran’s
story is more complicated than that.
Start with the economy. The collapse
of oil production that followed the reim-
position of sanctions caused gdpto
shrink by around 6% last year. A lack of
oil revenue has hurt government fi-
nances and undermined the rial. But
there is more to Iran’s economy than oil,
says Maciej Wojtal of Amtelon Capital, a
Europe-based fund that invests in Iran. It
has a domestic market of 83m, mostly
young people, roughly the same as Tur-key. A range of industries, from white
goods and cars to personal care and pro-
cessed food, serve that market. Sanctions
have not entirely suffocated trade. Iran’s
neighbours—notably Iraq and Afghani-
stan—lack its industrial base, and so im-
port a lot from it. Its neighbourhood in-
cludes Pakistan, Turkey and the uae. A
steadily weaker rial has over time boosted
non-oil export industries, such as petro-
chemicals, metals, engineering services—
and even chocolate and pastries, says
Ramin Rabii of Turquoise Partners, a
financial-services group.
The stockmarket reflects this industrial
diversity. There are hundreds of stocks in a
variety of sectors. And because crude is a
state-owned business, it better reflects the
non-oil economy. The market had a good
run last year thanks in large part to im-
proving export earnings. People took
notice. Here was an asset class that acted
as a hedge against the rial’s diminishing
value. The scene was set for this year’s
melt-up in share prices.
The trigger was the coronavirus pan-
demic, which hit Iran particularly hard.Industry stopped. Hard currency became
even scarcer. Since January the rial has
lost more than half its value against the
dollar, according to Bonbast, which
tracks the unofficial currency market.
Iran’s central bank flooded the banking
system with liquidity to try and limit the
economic damage. Inflation picked up to
almost 35%. Money soon found its way
into asset prices, including shares. Iran’s
government even raised a chunk of
revenue through a big ipoin April. As in
America, retail investors flooded in. The
number of people active in the stock-
market went from 700,000 to 5m in a
matter of months, says Mr Rabii.
There are shades of China in 2015
here: a fear of devaluation; a weak econ-
omy; and trapped capital feeding a stock-
market frenzy, cheered on by the govern-
ment. That ended badly. But stocks were
far from the only hedge in town in Iran.
Property prices in Tehran have surged
since American sanctions were reim-
posed, says Mr Rabii. Just about any
hedge against a weaker rial has mul-
tiplied in value, from gold coins to sec-
ond-hand cars. Others have noted a hint
of bubble dynamics in hard currencies in
Iran. The more they go up, the greater the
temptation to keep hoarding them.
Scarcity begets scarcity.
For Iran’s government, a stockmarket
boom was the least worst way to absorb
excess liquidity, says Esfandyar Batman-
ghelidj, of Bourse & Bazaar, a London-
based think-tank that focuses on Iran’s
economy. True, people who piled in at its
peak are now nursing hefty losses. But a
stockmarket bubble beats one in hard
currencies, second-hand cars or proper-
ty, all of which add to the cost of living.
Optimists will point out that China
survived its frenzy; the value of its stock-
markets has just hit a new high.The tale of Iran’s stockmarket bubble is familiar—yet also strangepension schemes has deteriorated as a re-
sult of the shifts in markets. When they cal-
culate the cost of meeting their pension
promises, funds have to discount the cost
of their liabilities using bond yields; as
yields have fallen sharply, these costs have
risen. The average public-sector pension
plan in America was 72.2% funded in 2019,
down from 78.4% in 2009, according to the
Centre for Retirement Research (crr), de-
spite the long bull market in shares.
The danger is that individual savers
faced with bewildering movements in
markets and rickety pension schemes maychoose to keep their savings in deposits.
Many may lack access to financial advice,
and are unaware of the scope for higher re-
turns or indeed of the scale of savings they
need to set aside to prepare for their old
age. A worrying signal can be gleaned from
Britain, where rules were changed in 2015
to allow people to withdraw money from
their pension pots without using the pro-
ceeds to buy an annuity (which offers a
guaranteed income). Annuity returns on
bond yields were stingy, making them an
unpopular choice.
With their savings stuck in cash elderlypeople around the world risk running out
of money before they die. This is already
happening in Japan. “The decline in inter-
est rates to virtually zero has sharply re-
duced the interest income that the retired
were counting on, requiring them to draw
down their savings more than they had
been planning to,” says Mr Horioka. Gov-
ernments have long urged people to make
provision for retirement, but low rates
have made that harder to achieve. With
society yet to square the circle, and rates
going nowhere anytime soon, savers’ lives
are set to get even more difficult. 7