DUBAI, Feb 14 A leap by the Tehran stock market in the past four weeks contrasts with gloom in many bourses around the world and hints at Iran's investment potential as its economy, long isolated by sanctions, rejoins the global trading system. Average daily trading turnover has tripled from last year to around $150 million.
The economy is still struggling - growth is close to zero, the jobless rate exceeds 10 percent and many banks face mountains of bad debt. Political tensions between hardliners and moderates could slow efforts to address these problems.
As a result, some commentators are warning that the notoriously volatile market may not hold on to its gains.
"The Tehran bourse is disregarding warnings and the condition of world markets ... It is going down the same road as in 2015, the result of which will only be a lack of confidence and the flight of capital from this market," the conservative Nassim news agency said in a commentary last week.
But many investors are betting that by restoring Iran's links with the rest of the world and attracting foreign capital and technology, the end of sanctions will trigger a long-term economic boom.
"The actual benefits of the lifting of sanctions will take six to 12 months to start to feed into companies' financials," said Payam Malayeri, head of asset management at Griffon Capital, a Tehran-based firm which last month launched an offshore equity fund focused on Iran.
"Investors are discounting that now - they are looking ahead to corporate earnings growth in 2017 and 2018."
Some economists think Iran's gross domestic product could grow 5 to 6 percent annually in the next several years. That would boost corporate earnings 15-25 percent a year, Malayeri estimated. Also, dividend yields are high at around 12 percent.
So far, auto stocks have led the rally because of prospects for tie-ups with foreign firms; Iran Khodro, which announced a 50/50 venture to build cars with Peugeot, has rocketed 52 percent. Pharmaceutical and engineering shares have also surged; banks and petrochemicals have underperformed.
Almost all new buying of stocks has been by local retail investors. Most foreigners remain cautious and while sending money into Iran has become easier, full international banking ties have not yet been restored.
But foreign fund inflows are picking up. Ramin Rabii, chief executive of Iranian investment group Turquoise Partners, which manages most foreign portfolio investment on the Tehran exchange, estimated $10-20 million had entered in the past three months, bringing the total outstanding near $100 million.
"We may see $100 to $200 million of fresh foreign money in the next 12 months," Rabii said. That would still be tiny compared to the market's capitalisation, equivalent to $94 billion at the free market exchange rate, but it would begin to establish foreign investors as a significant force.
There is plenty of risk. Debts in the banking sector, red tape and restrictive labour laws may slow any economic boom.
Initially, some companies or sectors could actually suffer as the lifting of sanctions exposes them to more competition. Renaissance Capital says steel producers' profit margins may shrink as imports of cheap metal increase.
Another risk is that reforms to improve the business climate could be stalled by political feuding between supporters and conservative opponents of pragmatic President Hassan Rouhani. A conference in London this month to unveil new Iranian contract terms for foreign oil companies was cancelled after internal clashes among officials over the contracts.
In an apparent effort to reassure investors that the uptrend in equity prices is justified, finance minister Ali Tayyebnia visited the exchange on Sunday and spoke positively about the market's gains.
But there are in any case some powerful factors supporting the bourse's uptrend. Under many ways of valuing stocks, Iranian equities are still cheap by international standards.
The market is trading at 7-7.5 times this year's projected corporate earnings - above its long-term average of 6 times, but well below 11 times for the world's frontier markets, Rabii said. With Iran now part of the global economy, valuations may come closer to international levels.
Meanwhile, falling bank deposit rates could push billions of dollars into stocks, Malayeri said. Deposit rates soared in the sanctions era, when inflation was high and the rial weak; authorities have begun guiding them down from above 20 percent.
Rabii said inefficiencies and distortions of the sanctions era had left pockets of value in the stock market which both local and foreign investors would exploit in coming years.
"You could buy a cement plant by acquiring a company for a third of the cost of building one from scratch," he said. "This is the kind of thing which will attract foreign investment."