THE BIG STOCK market winners over the past five years are unlikely to have boosted the portfolios of any but the most adventurous of institutional investors.
Looking at purely local currency returns, Ghana leads the way with a gain of 836.37% during this period. Taking account of dollar weighted returns, Iran is the top five-year performer, with a 537.81% gain.
Euromoney looks at three of the most impressive performers of the past five years. Romania's BET Index recorded a local currency gain of 753% and 406% in dollars, while Kuwait's KSE Index gained 345% in dollar terms. We start with Iran which has gained 574% in local currency terms.
Iran: share price growth outpaces high inflation
The number of companies listed on Iran's Tehran Stock Exchange has grown from 297 in 2001 to 407 in 2004, and 500 are expected to be listed before the end of this year. The TSE hopes to delist around 50 of the most inactive stocks and replace them with more important companies, including two large steel companies, up to six state banks and six state-owned insurance companies. This will diversify the exchange and boost market capitalization by another $45 billion. Market capitalization has already increased more than sixfold from $7.4 billion in 2001 to $47 billion in 2004, while average daily turnover rose from $4.4 million in 2001 to $44.9 million in 2004.
Iran is Opec's second-largest oil producer and the rise in oil price since 2000 has driven the stock market by creating excess liquidity. Double-digit inflation rates, ranging from 12.6% in 2001 to about 16.4% in 2004, have accompanied these rising oil prices.
Shadi Sedghinejad, managing director of Tehran-based legal and financial advisory firm Evina Enterprises, says that in 2002 Iranians began buying physical assets as a hedge against high inflation, notably cars and mobile phones, which could be bought at a set price for future delivery.
"Consequently the production of these assets grew but no returns were made; the demand was high but the supply was even higher so the returns in these physical assets were eroded," she says. "Such savings vehicles became less attractive. There are not a lot of financial tools available to institutional investors, so the only other investment vehicle available, other than the purchase of physical assets, is equity."
The Iranian government hopes to attract a far greater level of foreign investment and the core of its current reform programme includes the Law on the Attraction and Protection of Foreign Investment, which was approved by Iran's Expediency Council in May 2002 and implemented in February 2004. It aims to facilitate investment procedures and guarantee profit repatriation and was the first foreign investment legislation passed since the 1979 Islamic Revolution.
Some companies, prior to becoming listed on the Tehran Stock Exchange, had foreign investors. The main restriction on foreign ownership of privately held companies is that it cannot exceed 49% without requiring prior governmental approval. There is no law requiring divestiture in these companies by foreign shareholders after they are listed on the TSE.
Institutional investors such as retirement funds, investment companies and charities own approximately 80% of the shares listed on the TSE, with retail investors and high-net-worth individuals holding the remaining 20%. This imbalance looks set to change though.
"Individual investors would like to access the market but at the moment it is very limited," says Sedghinejad. "For example, there are no mutual funds yet in Iran so an individual investor has to take on the risk. There is also limited information, mainly because companies don't have to disclose financial performance and there are no analysts. There are some companies that offer advice on portfolios but they aren't regulated. This is beginning to change and the TSE is already discussing how to monitor these investment advisers."
Privatization of state-owned companies was another key mandate set out in the government's five-year development plan issued in 2000.
In early 2004, French car maker Renault signed an agreement with Iran's state auto holding company Idro for the joint production and marketing of Renault's new X90 model, aimed at emerging market buyers. The joint venture will be held 51% by Renault and 49% by AIS, an entity composed of Idro and Iran's two main car makers, Iran Khodro and Saipa. X90 production is set to begin in 2006. This marks a turning point for foreign participation in the Iranian market, as foreign car imports have been banned since 1979.
Car manufacturing and cement are among the top performing sectors on the TSE, while last year investment companies enjoyed the highest returns. Banks and investment companies are the biggest component of the TSE, accounting for 34%, followed by cement with 22% and chemical and petrochemicals with 12%.
Ghadir Investment Company, the supervisory arm for Bank Saderat Iran's 200 investment companies, is the largest company quoted on the exchange, with market capitalization of more than $3.3 billion. The company has been looking at a dual listing, possibly on the Deutsche Börse, but plans are not yet finalized.
With measures in place to improve regulation of the equity market and facilitate foreign investment, Iran's strong performance through the first half of the decade might even be sustainable in the second. Its privatization programme is boosting the market but it still has some way to go to overcome the split of opinion over the privatization of state-owned banks.
Romania: boosted by EU prospects
Romania's prospective accession to the European Union in 2007 has been a fundamental boost for the Bucharest Stock Exchange. In October 2004, Romania was granted "functioning market status" by the European Commission, in recognition of its efforts. On paper the Romanian economy looks to be in good shape. GDP growth is set to reach a record high of more than 7% in 2004 – the fifth consecutive year of GDP growth. Falling bank interest rates and government bond yields, accompanied by shrinking returns on time deposits denominated in foreign currency, are other factors that have boosted the performance of the BSE.