We need both social capital and elite consensus / Karimi: Investment priorities in Iran's economy have changed.

Saeed Karimi, CEO and Vice President of Behshahr Industries Group Investment Company, believes that in the current environment of Iran, both social capital and elite consensus are needed to overcome this difficult economic situation.

Zahra Ali Akbari: Iran's economic growth has reached minus 10% based on the latest statistics provided by the Statistics Center. These economic developments have undoubtedly changed the choices and priorities of investors. Saeed Karimi answered several questions regarding the current economic situation, investment choices and priorities and developments in this area following the change in economic conditions by appearing in Khabar Khabar Online Cafe.

This June manager believes that what can influence people's behavior today is "expectation management" and on the other hand, the main requirement is that governance must be agile in order to protect the production chain of companies. In response to a frequently asked question about which market to invest in in the current situation, he gave a detailed answer and said: My advice is to form a portfolio first of all. This was the subject of my doctoral thesis that was defended in 2018 at the University of Science and Technology; The fact that we have several scenarios, each of them leads to a result, we have to give probability to the scenarios and make a decision to get the most benefit and suffer the least damage. With this logic, my advice is that people keep a part of their assets, for example, something close to 30-40% depending on the conditions, in cash or gold, and the rest can be put into the stock market according to the current conditions; But it is better not to enter directly and leave the money to those with more expertise. For example, don't focus on portfolio managers or sector funds and on single shares to manage their risk.

The description of this interview follows.

* According to the latest statistics published by the Statistics Center, Iran's economy has shrunk by 10.1% this spring. This is the latest post-war statistics and presents a worrying picture of Iran's economy. In your opinion, considering the size of the economy shrinking, should investment priorities be changed?

This question can be looked at from two perspectives. One from the macro dimension and the other from the corporate dimension. I prefer to address the second area first. Our company, which is an active investment company in the capital market, and due to the changes in the macro economy, it is necessary to review its priorities. But how did this decline in economic growth happen? As you know, the oil sector and the export of oil and its derivatives are the main part of our country's gross domestic product. The sale of oil and oil derivatives after the war, especially after the intensification of the blockade, has been severely restricted, and this restriction has led to a decrease in the government's income, naturally causing problems in the country.

Apart from that, the blockade has also caused production companies to face problems; Companies whose production is dependent on imports are facing problems, and on the other hand, companies whose sales are dependent on exports are facing problems in some way, and this has disrupted the production process of some companies.

For a company like us, whose main activity is in the capital market, the most important priority is to look for companies whose value chain from supply to production and sale will not suffer.

* In this environment, what choices does the signal sent by the government to the economy make for the investor?

By the way, one of the most important factors for decision-making is the role of the government. What we see now and what the government has emphasized is that for the government, the existence of goods is more important than the price of goods; In my opinion, this is also the right choice, because it removes the concern from the investor whether the government puts pressure on the price of the produced goods or not. In this space, it is natural that we go to a part of the market that is more related to people's daily needs. As a rule, people reduce a series of demands in this space. What can be reduced less is food and daily necessities. So these are our priorities for entry. By the way, these have caused the priorities to change significantly. If you break down stock price growth by sector, you'll see that consumer-related sectors have grown more than 100% since the market opened, while import-related groups have seen little growth. This is what is overshadowing the market now.

* A question arises. It is true that priorities have changed, but can a stock exchange company like yours play a role in the reconstruction of the national economy in the post-war era through investment and portfolio management?

If I want to give a straight answer, I must say that our company is a private company. The company was created to maximize the interests of its shareholders, who are a significant part of the general public; Just as every person has a mission to protect himself and his family in the first place. Therefore, our main priority is our shareholders. Expecting real and legal persons to act against their own interests is an unreasonable expectation, and in my opinion, these unreasonable expectations are one of the sources of the problems we are facing in the country.

We have to make sure that if someone does not follow the law, he will be the main loser immediately.

* How should the interests of private companies be aligned with national interests so that the economy enters the path of reconstruction?

One should not expect much from a private company. It is the politician who has the main role to create such conditions. The policymaker should set the playing field so that the interests of a private company are in line with the national interests.

* Considering these developments, have we faced a change in policy direction?

What do we know about politics? As I said, the government has preferred the availability of goods and not facing famine over the price of goods. Well, this is a new policy. The opposite policy would be for the government to say that it is a war situation and I have to tell anyone what to produce, what to sell, how much to sell, and I will give coupons to the people and I will determine the price. This is also a policy. Some people recommend it, but the government has clearly announced its policy.

* What is your specific suggestion for managing this space?

If I want to make a suggestion, I must say that something that can influence people's behavior today is "expectation management". You can see that the prices have increased so much in the six to seven months after the war and in many items even a hundred percent increase has occurred because people see the situation deteriorating, as a result they enter the market faster or if they want to sell something, they don't sell. The price can be increased. So if we are going to bring people together, we have to manage expectations.

The next issue is that governance must be agile in order to protect the production chain of enterprises. We all know that some companies have encountered problems and the stock of companies to continue production is decreasing. So we must have an economic command center so that it can make the necessary decisions quickly. This agility is necessary to overcome these conditions.

* Statistics show that inflation on the basket of essential goods, i.e. daily consumer goods, has increased, even food inflation has reached triple digits in some provinces. Are your investment priorities directed in the same direction?

yes The weight of investment in this area has increased. If we divide the market into different industries, the share of food and pharmaceutical industries, or in other words, what is in contact with people's tables, has increased in our portfolio. It seems that the country's industrial strategy in the past years has been to convert imports into domestic production as much as possible. When you do such a thing, you are dependent on imports for the supply of raw materials for a significant part of the same production. Now, a large part of this import has been stopped and what is available has a high price. If these industries continue to produce according to the profit margin they consider for themselves, the value of their shares will increase and their share in our portfolio will also increase.

* We are now witnessing record-breaking stock markets, although the stock market lagged behind other investment markets. Considering the negative economic growth of 10%, what is the most important reason for the record breaking stock market?

If the stock market of a country works properly, it should be a full-length mirror of the economic situation of that country. First, we need to see if we are facing "increasing numbers" or "real growth". We have an index called the dollar value of the stock market, which has not changed much; So we conclude that only the numbers have increased, not the actual value. I will give an example. If I had a car last year that cost two billion tomans, but this year it is four billion tomans, did I make a profit? If I sell this car, can I buy twice as much as last year? The answer is no. So we are facing a special situation. That the numbers are getting bigger.

Now there are several reasons for this increase in numbers. First, the parallel markets are somehow facing stagnation and the liquidity of production companies that have shrunk goes to the stock market. On the other hand, some companies sell in dollars, and with the decrease in the value of Rial, their profit in Rial is shown to be bigger and the market increases their price accordingly. There is a third reason among them. The market maker tends to direct the liquidity to the capital market instead of other markets and give direction to the market. At the same time, the fear of war that existed until last year has disappeared. Now that we have experienced the war and the performance of governance in the stability of the macro system has been better than expected, this fear has decreased.

Considering these factors, I think the overall trend of the market will be positive until the end of the year, despite the possible declines.

* Has Iran's capital market matched the dollar, which has reached a level higher than 250 thousand tomans, or is it still far away?

Perhaps one should ask how much the market reacts to the community's field information; I think this reaction is reasonably effective and instantaneous. Meanwhile, the trend that has happened is that the dollar price of government companies has increased in proportion to the free dollar price, and this approach has shown itself in the stock market. The market still sees the upward trend of the dollar; If you poll activists and economists about the dollar forecast until the end of the year, I don't think the average will be below 300 thousand tomans. Therefore, for companies with dollar income, the market includes this forecast in the stock price.

Can the capital market help companies?

* In the current conditions of the capital market, how can it help companies?

The most important need of manufacturing companies related to the financial industry is financing, which is mainly done through banks in our country. One of the reasons that I think has affected our society is the mandated bank interest rate. When this rate is much lower than the rate of inflation, it effectively becomes a rent, a rent that whoever gets to it first wins. Now maybe the most expensive bank loan is about 40%, while the inflation in society is touching 60-70%; Taking back the same loan is also considered as rent.

This situation has caused the banking facility to become a rent for many years that people and companies compete with each other to get it and establish a relationship with the banking network; In my opinion, this is one of the problems of our country. This would not be the case if we allowed the bank, as a true private enterprise, to sell money at a price favorable to its shareholders.

The way to help the capital market is to make the process of financing a private company easier and cheaper through the capital market; We must reduce the costs of this process and reduce the costs for the supplier and recipient of capital and bring together devices such as the tax field. Our collection itself has the experience that we provided financing a few years ago, and for nearly four years now, we have been involved in the discussion of tax exemption and added value with the Finance Department; It was a very difficult experience.

* In the current situation, how can investment companies play a role in maintaining the production chain?

If we can put the production company in the hands of financiers, this is the help that the capital market can give to production; I think this is the most direct way.

* Even before the war, the issue of strengthening financing from the capital market and reducing the control of banks was discussed; Why didn't this happen?

This requires an independent research work, but I think one of the reasons is that bank money can always be cheaper than capital market money, because the price of money in the bank is not real, but it has its real price in the capital market. Therefore, for a firm that needs financing, it makes more sense to pursue cheaper (banking) money than more expensive capital market money. When the interests of companies are in one direction, they cannot be expected to follow another direction.

*Does the current policy provide this possibility or do we need to change?

Two directions are necessary: one is the formation of the capital market process, the other is the rationalization of the price of money in the banking market. When someone asks me for money in the capital market, I weigh the risk against my other options and set a rate that is proportional to inflation and risk appetite; But in the bank, the price of money is almost fixed and unrealistic. I don't think until the price of money becomes real in the banking sector, financing from the capital market will achieve a significant result.