ran nvestment TURQUOISE Monthly February 2009 Volume 3, No. 29 PARTNERS
THIS MONTH
Market Overview 2 In January, the Tehran Stock Exchange (TSE) reversed its downwards trend. There was a notable recovery in most commodity-focused stocks. Nevertheless, investors remain cautious as they await the outcome of parliamentary decisions on next year’s budget and a bill to amend subsidies. This section provides an analysis of the market and some of the main sectors.
Turquoise Iran Equity Fund 4 The Turquoise Fund’s NAV declined in January, losing 2.4% in value. This section provides data and charts on the Fund’s performance.
Country Overview 6 The effect of the global economic crisis on the Iranian economy will be the focus of discussion in this section.
Economy 8 The third mobile phone operator license, the oil field devel- opment contract between Iran and China, the expansion of mining in Iran and Iran’s economic freedom rating will be discussed in this section.
Iran Investment Monthly is produced by Turquoise Partners, No. 58 East Gord Alley, Turquoise Partners. Distributed electroni- Bidar St., Fayyazi (Fereshteh) Ave. cally by exclusive subscription. Tel :+98 21 220 35 830 Fax :+98 21 220 49 260 Chief Editor: Ramin Rabii Email : [email protected] Consulting Editor: Eddie Kerman To find out more about Turquoise Partners, Authors: Shervin Shahriari visit our website at: Ali Mashayekhi www.turquoisepartners.com. The Tomb of Khayyam, The Famous Iranian Mathematician, Philosopher and Poet, Ancient City of Neyshabour, North-East Iran Ancient City of Neyshabour, The Famous Iranian Mathematician, Philosopher and Poet, of Khayyam, Tomb The © 2009 All rights reserved Iran Investment Monthly, Volume 3, No. 29 in defensiveinvestmentssuchas a result,manyinvestorshavetakencautiousattitudetowardstheequitymarketandchosen to remain and thesubsequenteconomic, month forparliamentaryapproval. The outcomeofthisparliamentaryreviewandtheresultingdecision, for theremovaloftheirsubsidies. Also, thegovernment’s budgetforthecomingyearwassubmittedthis Meanwhile, detailsremainunclearregardingthegovernmentalproposaltocompensatevarious industries month. The removalofenergy subsidieswouldhave amajorimpactonproductioncostsformanyindustries. reform” plan)wasreviewedbyparliamentaryspecialistcommissionsinJanuary;itwillbevoted onnext The dynamicsofthemarketdiffered markedlyineachof thetwohalvesofJanuary. Inthe stocks ofcommodity-focusedcompanieswasnotablethispastmonth. commodity andcrudeoilprices,the TSE hadfallenover thepastfewmonths.However, therecoveryin In January, the Tehran StockExchange (TSE)reverseditsdownwardtrend. With themeltdowninglobal Market Overview 21 focused companiesandalsothemacro-economicoutlookfornextIraniancalendaryear(beginningon Analysts explainthatinvestorsremainconcernedaboutboththepro volumes fellsubstantiallybytheendofmonth. gains. However, bullishsentimentwasshort-livedandthemarketquicklyreturnedtostabilityastrade many otherstocks. The resultwasthat,inthethirdweek of January, themainmarketindexpostedmoderate January. This broughtaboutadegreeofpositivesentimentinthemarketandincreasedbuyingdemandfor queues ofthesestocksdisappearedquickly. Consequently, themarketindexbegantostabilisebymid- since thepeaksofsummer. However, manyofthemattractedhugeinterestfrominvestorsandtheselling Many commoditystocks,suchasthoseintheminingandpetrochemicalsectors,hadlostconsiderablevalue the month,therewerelarge tradevolumesbecauseanumber ofinstitutionalinvestorsreturnedtothemarket. debate andstronglobbyingbyindustryplayers,thegovernment The mostimportantdevelopmentinthe TSE inJanuarywasthecementsector. After severalmonthsof Cement Some ofthekeysectorsmarketwillbeanalysedbelow: signi companies andprovedshort-lived.Cementmanufacturers withoperationsclosetoIran’s borderscould Investors, however, werecautiousinrespondingtothisnews.Stockpricerallies wereinahandfulof domestic demand. volumes. However, theslowdowninreal-estatesectormeantthatsupplyof cementbegantooutpace summer, mostmanufacturersbegantoacceleratetheirexpansionplansandincreaseproduction This hadpreviouslybeensetat$100pertonne.Followingtheliberalisationofcementprice thispast are locatedinthecentreofIrancannotexporttheir productspro are upto100%higherthanthedomesticprice.However, duetohightransportation costs,companiesthat half oftheyearformajority ofbanks. Therefore, anygrowth inpro The sharpfallinliquidity growthintheeconomyhasresultedlower ratesindepositsthesecond Banks argue thatthis strategycould actasadouble-edged swordforsome ofthese banks. This isparticularly true proved very successfulandmostbanks wereabletoattract substantialnewdeposits. Analysts, however, on one-year term deposits(16%ifredeemed priortomaturity) inordertoattractnew deposits. This plan lower thanforthecurrent year. Overthepasttwomonths, themajorityofbankshaveoffered 19%interest st March). The government’s billfor theremovalofenergy subsidies(aspartoftheso-called “economic fi cantly bene fi t fromthisdevelopment. This isbecause cementpricesinsomeneighbouringcountries fi scal andmonetarypolicieswillhaveasigni fi xed-income productsuntiltheseissuesareclari fi fi nally removedtheexporttariff forcement. tably. fi fi tability prospectsofcommodity- ts fornextyearisexpected tobe fi cant effect onthemarket. As fi ed. fi rst twoweeksof 2 Market Overview 3
for state-owned banks, the majority of which operate on low profit margins. While the one-year deposits have brought new funds into banking system, the “cost of money” has increased, resulting in lower margins for the banks.
Iron Ore and Steel Shares of the two listed iron ore companies, Chador Malou and Gol Gohar, have lost around 50% of their value since mid-summer. However, with the introduction of market makers for these two stocks, both stabilised very quickly and experienced buying queues towards the end of the month.
Stocks of steel manufacturers have also been among the worst performing sectors since mid-summer, and experienced a relatively stable month. Mobarakeh Steel Company, the second largest listed company by market capitalisation, is currently trading with a price to earnings ratio of around 2.5.
There is currently much debate between iron ore and steel producers regarding next year’s iron ore prices. Despite the domestic iron ore price having been significantly below global prices over the past few years, steel makers are demanding a price cut for next year. The average price of iron ore domestically is $55 per tonne, and it seems that the best scenario for iron ore companies would be for prices to remain unchanged next year.
Overall, the TSE experienced a mixed month, with the TSE All-Share Index (TEPIX) losing 1.7% of its value. Trade volume stood at $202 million, showing a 48% decline from the previous month.
Performance of TSE All-Share Index (January 2009)
8700
8650
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8450 Volume 3, No. 29 Volume 8400
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Iran Investment Monthly, TSE All-Share Index (TEPIX) Iran Investment Monthly, Volume 3, No. 29 Turquoise IranEquityFund historical performanceoftheFund. well astheoverallperformanceofFundinUSD,EuroandGBP. The performancetablealsodisplaysthe the Fundagainstboth TEPIX inlocalcurrencyandalsotheMSCIEmerging MarketindexinUSD,as The chartsbelowprovideanupdateupuntilthemiddleofFebruary, onthefollowing:performanceof course ofthemonth,with TSE All-Share Index(TEPIX)losing1.7%invalue. December tostandat131.7bytheendofmonth. Also, mostmarketindices continuedtofalloverthe Monthly Report– with greaterdiversi the Tehran StockExchange(TSE)andotherIranian-basedsecurities. The goalistoprovidesuperiorreturns, world. Turquoise combinesinternationalexperiencewithlocalexpertiseininvestingequitieslisted on in theconsumerandcommoditypotentialofIran,onemostundervaluedemerging marketsinthe Investment Objective re-based to 100 104 112 120 128 136 144 152 160 168 176 184 192 200
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Turquoise Fund /
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cation andlowervolatility. The basecurrencyoftheFundisIranianRial.
The Net Asset Value (NAV) ofthe Turquoise Fundfellbyapproximately2.4%in
Turquoise Iran EquityTurquoise Iran Fund /
0 6
– The Turquoise EquityFundseekssuperiorlong-termcapitalgrowthbyinvesting
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Turquoise Portfolio vs. TSE All-Share Index (TEPIX) Index TSEAll-Share vs. Portfolio Turquoise
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Performance
As of 15 February 2009
Period Fund Return
Last Month 0.9 %
Last 3 Months 14.9 %
Last 6 Months 28.4 %
Last 12 Months 10.0 %
Since Inception 30.8 % (30 May 06)
Turquoise Performance vs. Turquoise Performance in MSCI Emerging Markets US Dollar (US$)
196 190 188 180 170 180 160 172 re-based to 100 re-based to 100 150 164 140 156 130 148 120 140 110 132 100 90 124 80 116 70 108 60 100 50 92 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 17/8/08 15/11/08 13/2/09 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 17/8/08 15/11/08 13/2/09
Turquoise ($) M SCI Emerging Markets (rebased to 100)
Turquoise Performance in Turquoise Performance in Euro (€) British Pound Sterling (£) Volume 3, No. 29 Volume
172 166 188 160 180 154 172 164 re-based to 100 148 re-based to 100 142 156 136 148 130 140 124 132 118 124
Iran Investment Monthly, 112 116 106 108 100 100 94 92 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 17/8/08 15/11/08 13/2/09 30/5/06 28/8/06 26/11/06 24/2/07 25/5/07 23/8/07 21/11/07 19/2/08 19/5/08 17/8/08 15/11/08 13/2/09 Country Overview 6
The effect of the global economic crisis on the Iranian economy will be the focus of discussion in this edition of Country Overview.
Following several years of benign economic conditions and accelerated growth of asset prices, high levels of consumer and corporate debt in most Western countries (particularly the US and the UK) led to a credit crisis in 2007.
From the beginning of 2008, the credit crisis continued to exert increasing pressure on capital markets and financial services companies, forcing a number of the latter into bankruptcy. The crisis came to a head in the late summer of 2008. With an increasing number of bankruptcies, the crisis spread into both other sectors of the economy and also other countries around the world. Within a few months, many economies were forced into recession. One of the most notable results of the crisis was a meltdown in asset prices, particularly commodities.
Experts argue that because Iran has been relatively isolated from international markets, the effect of the economic crisis on Iran’s economy has been limited. While this may be true to some extent, different sectors of Iran’s economy have been impacted to varying extents by the global crisis. To assess the real impact of the crisis, we will analyse four distinct areas, namely the financial system, industry, government and macroeconomic factors.
Financial System Iran’s financial system has been isolated from global markets since the Islamic revolution. All international business transactions have been conducted on a simple basis, such as letters of credit and money transfer. Consequently, the influence of the financial crisis on the Iranian financial system itself has been insignificant. In fact, some experts argue that Iran has benefited from the crisis, because some investors, who are seeking diversification from the Western markets have begun to look into the Iranian capital market.
Due to the generally low levels of consumer and corporate debt, most Iranian banks are not confronted with high credit risks. For example, loan to value of mortgages in Iran are rarely above 50% and in most cases are no more than 25%. Also, unsecured lending is not permissible in Iran. This year, doubtful debt in the Iranian banking system has increased to approximately $30 billion, according to the Central Bank. However, the main reason for this is the huge differential of the lending rate and the inflation rate in Iran. This has resulted in an arbitrage in the lending market. Most borrowers, therefore, are reluctant to repay their cheap loans, which are currently harder to find. The result of lower excess liquidity in the economy next year (see Macro- economic Indicators section) would be a slowdown in the banks’ deposit growth rate.
The equity market has lost around 40% of its value since the highs of mid-summer. Nevertheless, falls in the Tehran Stock Exchange have been less than most major indices around the world. In fact, according to statistics released by the World Federation of Exchanges, the TSE was the only member exchange with positive returns in 2008. Overall, the global crisis has not had a significant effect on the health of Iran’s financial system. Volume 3, No. 29 Volume
Industry The effect of the economic crisis on the industrial sector in Iran is dependent on the specific industry. Industries and mines form approximately 20% of Iran’s GDP. Although Iran has a diversified industrial base, minerals and other mining-related commodities comprise the major segment of non-petroleum exports. The slump in prices of metals and mining products (such as steel, zinc, lead, copper and iron ore) has eroded the Iran Investment Monthly, profitability of these sectors. Moreover, it has created uncertainty about the future prospects of some of these commodity-focused companies. On the other hand, those industries which are consumers of commodities Iran Investment Monthly, Volume 3, No. 29 Country Overview The riseinthecrudeoilpriceoverpastfewyearsresultedgovernmenthavingsigni budget isheavilydependentonthisincomestream. approximately 80%ofIran’s foreignincomecomesfromthissource. The resultisthatthegovernment price fallsinthesecommodities. Although theoilandgassectorconstitutes only10%ofIran’s GDP, Governmental revenuesfromthesaleofcrudeoilandnaturalgashavetakenasubstantialhitglobal The government relatively strong. Statistics showthat,unlikeinmost Western economies,demandinIran’s consumermarketremains could potentiallyenjoyhigherpro are setbythegovernmentandhaveremainedunchangedforseveralyears.Consequently, thesecompanies signi have bene for nextyear’s economic growthrangefrom 3%to4.5%. Iranian property sectorbeganearlier thisyearandisexpected tocontinuenextyear. Analysts’ predictions mentioned above.Inaddition, 5%ofIran’s GDP comesfromthereal-estate sector. The slowdowninthe for thecurrentyear. However, forecastsindicatealowergrowthrate fornextyearbecauseofthereasons ended 20 Iran’s economicgrowthhasbeenstrongoverthe pastfewyears.Lastyear(Iranian1386, which June). pursued aggressiveexpansionary revenue beyonditsbudgetaryrequirements.Sinceitcametopowerin2005,thiscurrentgovernmenthas government willbefacedwithabudgetde past fewyears,althoughdoingthiswillprovedif expenditures. Analysts believethatthegovernmentwillnowbecompelledtoreverseitspoliciesof OSF tocoverthepotentialbudgetde that thereiscurrently$25-$35billioninthisfund. Therefore, thegovernmentcannotsolelyrelyon price. The governmentdoesnotdisclosetheexactamountofreservesinOSF, butanalystspredict surplus revenues. The aimofthiswastoinsurethegovernment’s revenuesagainst In 2000,IransetupanaccountknownastheOilStabilisationFund(OSF)asafehavenforcrude oil the rangeof$15-$30billion,basedonanaverageoilprice$37. in signi As mentionedabove,thegovernment’s injectionofexcessiveoilrevenuesintotheeconomyhadresulted Macro-economic Indicators energy subsidiesandtheprovisionofpartialcompensationthroughcashpaymentstopublic. to criticismbysomeexperts,iscurrentlyunderreviewintheparliament. This billproposestheremovalof on goodshavebeenproposed. Also, thebillforso-called“targeted subsidies”,whichhasbeensubject example, theintroductionofbothcapitalgainstaxesforreal-estatesectorandalso Value Added Tax governmental revenuesandreduceexpenditure.Oneexampleisamajorreforminthetaxationsystem. For expected toresultinadownwardtrendthe has occurredoverthepastfewmonths. This, alongwithlowercommodityandconsumergoodsprices,is of summer2008. The slumpintheoilpricemeantthatliquiditygrowtheconomywoulddiminish,as calendar year(20 policies remainunchanged,analystspredictthatthe in fi cantly. A goodexampleofthisistheautomotivesector. Factorypricesforautomotivecompanies fi cant excessliquidity. Consequently, thein th fi March2008),Iran’s realGDP growthstoodat6.9%andexpertspredict agrowthrateof5.9% ted fromlowerproductioncosts. This isbecausetheprices oftheirrawmaterialshavedeclined th March)andto18%bytheendof1 fi fi scal policies,andhassubstantiallyincreaseditscapitaloperating t margins nextyear. fi cit. A numberofplanshavebeenintroducedinorder to increase fi cit nextyear. Predictionsfornextyear’s budgetde fl ation rate.Subjecttoallmacro-economicandgovernment fi fl cult. As a result, thereisarealisticpossibilitythatthe ation ratehadsoaredtoapproximately30%bythe end fl ation ratewillfallto22%bytheendofIranian st quarterofthenextIraniancalendaryear(20 fl uctuations intheoil fi cant excess fi cit arein 7 th Iran Investment Monthly, Volume 3, No. 29 Economy Azadegan oil (CNPC), China’s largest oilandgascompany, signeda$1.7billiondealforthedevelopmentofIran’s North In mid-January, theNationalIranianOilCompany(NIOC)andChinaPetroleumCorporation Iran andChinaOilFieldDevelopmentContract phone penetrationrateofbelow40%. because ithasapopulationofaround70million,anunderdevelopedtelecominfrastructureandmobile subscribers collectively. Iranisviewedasoneofthemostattractivetelecommarketsinworld. This is Company ofIran(TCI)andIranCellMTNholdlicensesforoffering 2Gservicesandhave40million respectively. OthertenderscamefromIndianandMalaysianconsortiums.Currently, Telecommunications According tothepress,consortiumsheadedbyZeinofKuwaitandOman Telecom camesecondandthird phone technology, alsoknownas3G. two furtherperiodsof5years. The licensegives2yearsofexclusivityforoffering thirdgenerationmobile The upfrontlicensefeeis€300million($402million). The licensetenureis15yearsandrenewablefor and Tamin Telecom (51%share),asubsidiaryofIran’s SocialSecurityOrganisation, wasthehighestbidder. mobile phoneoperatorlicenseinIran.ItannouncedthataconsortiumofEtisalattheUAE(49%share) In January, Iran’s CommunicationsRegulatory Authority (CRA)formallyannouncedthewinnerofthird Third MobilePhoneOperator License fi at 6.46, animprovement of3% fromtheprevious year. Hong Kongremains atthe topofthis table. Each country isgivenascoreofupto 10ineachofthesecategories. Inthisreport,Iran’s overallscorestood rights, access tosoundmoney, freedomtotradeinternationally, andregulation ofcredit,labourand business. Statistics releasedbytheCentralBankshowthat inthe government planstoincreaseextractionvolumes to500milliontonnesperannum. total miningreservesamounttoapproximately57 billiontonnes,or7%oftheworld’s totalreserves. The of Iran’s largest oil up 12places,from92 In thelatestEconomicFreedom ofthe World rankingtablepublishedbytheFraserInstitute, Iranhasmoved Iran’s EconomicFreedom Rating Iran’s miningproducts. non-oil andgas-basedexports. The UAE,China,Iraq,IndiaandSouthKoreawerethemaindestinationsfor billion. This showsanincreaseof40%inearningsand3%volume. This – October2008),thetotalvalueofexportedminerals andproductsofrelatedindustriesstoodat$11.3 According toIranianof and was investment forthedevelopmentofitsoilandgas Despite sanctionsandUSefforts toisolatethecountry, Iranhasbeenabletoattractconsiderableforeign second developmentphaseistobeawardedCNPC. repayment periodof12yearsforthe revenues within25yearsoftheinitialdevelopment. The contractisbasedonabuybackscheme,with and theproductionratewillbe75,000barrelsofcrudeoilperday. Iranisexpectedtoearn$16billionin to reach230milliontonnesperannumbytheend ofthecurrentIraniancalendaryear(20 past 4years. Total annualextractionvolume stoodat150milliontonnesperannumin2005,andisexpected According totheMinistryofIndustriesandMines,miningextractioninIranhasincreasedby53% overthe Expansion ofMininginIran Sinopec ofChina,SKSMalaysiaandEdisonInternationalItaly. ve factors. These includethefollowing:sizeofgovernment, legalstructureandsecurityofproperty fi rst discoveredin2000. fi eld. North Azadegan, whichissituatedinthesouth-westernprovinceofKhouzestan,one fi elds. This oil elds. This nd to80 fi cials, the th , incomparisontotheprevious year. This tableranks141countries basedon fi fi rst phaseofthedevelopmentprojectwilltake48monthstocomplete eld hasrecoverablereservesinexcessof5billionbarrelscrudeoil fi rst phase. Also, uponsuccessfulcompletionofthe fi elds. Lastyear, Iransigneddevelopmentcontractswith fi rst 8monthsofthecurrentIranianyear(March fi gure amountedto87%ofIran’s th March).Iran’s fi rst phase,the 8 Iran Investment Monthly, Volume 3, No. 29 fi is madetoensurethatthefactswepublisharecorrect.However, wedonotrepresentthatallfactsand The analysisprovidedbythispublicationisbasedoninformationthatweconsiderreliableandevery effort an offer tobuyanyspeci This materialisforinformationpurposesonlyanddoesnotconstituteanoffer tosell,norasolicitationof Disclaimer only orthroughanonlinerequestsentto:[email protected] worked closelyorhavebeenincontactwith Turquoise Partners.Subscriptiontothisnewsletterisby referral This publicationdoesnotprovideindividuallytailoredinvestmentadviceandmaymatchthe and inaccuracy. Iran Investment Monthly Investment Iran ates Turquoise isaboutiqueinvestmentbankbasedinIranwithof About Turquoise Tehran StockExchangeaswellintroducingnew cipients updatedonthelatestmacroeconomicdevelopmentsinIran,providinganin-depthanalysisof potential investors. consent of Turquoise Partners. mechanical, photocopies, recordingorbyanyinformationstorageretrieval systemwithoutpriorwritten No partofthisnewsletter maybereproducedortransmittedinanyform orbyanymeanselectronic, Copyright Notice future success. all investors. The valueofaninvestmentcangodownaswellup.Pastperformanceisnoguarantee circumstances ofsomeitsrecipients. The securitiesdiscussedinthispublicationmaynotbesuitablefor Iranian market.Havingaquali Turquoise tobene Turquoise publishesthiselectronicnewsletter, gures arecompleteandaccurate;therefore,wecannotbeheldlegallyresponsibleforerrors,emissions fi nancial productsandoffers fi t fromcouplinglocalknowledgeandpresencewithglobalexpertise. fi isdistributedexclusivelyamongstIrananalystsandpotentialinvestorswhohave c shares. fi ed anddiversemanagementteambasedbothinEuropeIranenables fi nancial servicestoselectclientsandinvestorswhoareinterestedinthe Iran Investment Monthly Investment Iran fi nancial productsandprivateequityopportunitiesto fi ces in Tehran andLondon. Turquoise cre- , withtheaimofkeepingitsre- fi nancial 9