The Iranian bourse is in the midst of a fantastic rally on the back of high oil prices, new initial public offerings and lack of other investment opportunities for Iranians.

With a number of sectors represented on the index, Iranians are benefiting from investing in a deep, liquid environment, trading around 200 million shares per day in a market that is capitalised at $100-billion - roughly the size of UAE and Kuwaiti bourses and much bigger than the Egypt Stock Exchange.

The TSE 'miracle' has mirrored the rest of the economy, which has benefited from liberal policies that have focused on reducing the public sector and offloading nationalized companies on to the exchange, with healthy participation from average Iranians.

But perhaps the biggest reason for the exchange's success is its relative isolation and un-correlation with the rest of the global and regional markets, due to strict sanctions imposed on the country. Its only connection to global financial flows is through energy prices, which may offer some clue as to why the exchange has performed well, given crude's own upward trajectory.

Iran's financial markets remain a mystery wrapped in an enigma to the outside world. With strict sanctions imposed on the country foreign investment remains limited at best, which is why the Tehran Stock Exchange (TSE) is largely ignored by wire agencies and regional papers.

The Tehran Stock Exchange All Share Index (TEPIX) has risen an astonishing 200% since April 2009, and market fundamentals suggest there are no signs of cooling down anytime soon.

The market has been buoyed by fresh initial public offerings (IPO), a result of Iran's massive privatization program which states that 80% of state assets are to be sold -- 40% are allocated to low-income households and the other 40% is offloaded via an IPO.

However, the International Monetary Fund (IMF) does not believe that the TSE is in the midst of a bubble.

"The TSE is not an outlier on a cross-country basis, although the price surge between early 2009 and April 2011 has been the largest in any 2-year window over its past ten years. China, Egypt, and Saudi Arabia have had price surges up to twice as large as Iran during this time," says an IMF report on the exchange.

Moreover, Iran's episodes of stock market corrections since 2001 have been the smallest among comparative countries (27 percent versus China's 70 percent).

"Even if the TSE dropped to the extent of China's peak correction, it would still post gains of 40 percent at the one-year horizon," the IMF notes.

There are other indicators that suggest that the TSE has not run out of steam.

Real stock prices are still 30% below their 2004 peak, according to estimates and price-to-earnings ratio for most stocks hover around 10 on average.

"Low P/Es could reflect frontier market status and the impact of sanctions. A sectoral analysis of the TSE suggests that sanctions may have boosted earnings of diversified industrials and motor vehicles and parts through import substitution, including through government procurement channeled to domestic producers,' says the IMF. "It is also the case that the fundamentals of basic metals, mining, or petrochemicals have benefited from the surge in global commodity prices."

Daily volumes appear to be healthy, too. An Iranian bourse shows share trades regularly hit 200 million in early August, nearly double that of Saudi Arabia's Tadawul index which has seen trading of around 100-125 million shares over the past couple of years.

Since 2007 the TSE market has been broken into a main market with minimum capital of IR200bn-100bn and a secondary market with a minimum capital of IR30-billion.

Banks are the most heavily traded stocks on the exchange. At end-2010, the TSE sub-sector "Monetary Intermediation" had the largest capitalization of the TSE's 39 sectors (18 percent of the market), with four banks being in the top ten listings by market cap. The sector also accounts for more than half of total market turnover, because of its higher free float relative to other market sectors, according to the IMF.

The Central Bank of Iran also stipulates that no individual can hold more than 5% of a banking stock, which ensures that these stocks remain liquid. The banks also pay dividend and enjoy support from the government, adding to their attraction among Iranian investors.

There are currently 342 securities - of which at least around 232 are actively traded - on the exchange and the current market capitalization stands at around $100-billion. Close to 90 brokers are listed on the Tehran Stock Exchange.

A TSE statement suggests that foreigners can invest on the exchange.

"People from other countries may invest in Tehran stock exchange. Foreign investors can invest in TSE, directly or indirect (mutual funds) by intermediation of TSE's member. In addition, foreign investment Act has large benefits for foreign investors," notes a TSE statement in response to a FAQ on the website.

The Iranian stock exchange has emerged as one of the few investment alternatives for individual Iranian investors. Tax exemption on dividends and capital gains have also encouraged Iranians to invest in the market, especially as negative real deposit rates since 2007 have spurred interest in trading, apart from real estate, gold and foreign exchange.

But as long as oil prices remain over Iran's preferred $100 a barrel of Brent, the TSE may just be - theoretically speaking - the perfect, insulated hiding place to weather the global market turmoil.

(Source: alifarabia.com)