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18-Nov-2018

Egypt Strategy Update: No rate hike and local flows to drive year-end rally

CBE’s message on Thursday, local flows to drive year-end rally 

The CBE gave a clear message on Thursday: “Given the contained underlying inflationary pressures and the transitory nature of the supply shock related to select fresh vegetables, the MPC has decided to keep key policy rates unchanged.” This should: i) come as a relief to equity markets; and ii) lead to more local flows. Local institutions have net sold EGP610mn over Sep/Oct and EGP3.7bn YTD. However, this month they have net bought EGP265mn, and there is plenty more cash sitting on the sidelines. We believe EGX30 could finish the year at 15,150 (10.4x EGX30 2018e adjusted positive EPS, which is one standard deviation below historical adjusted positive trailing P/E). The EGX Real Estate Index has underperformed YTD and since the year’s peak, and it could lead the bounce. Historically, December and January have seen the best returns (going back to 1998), coinciding with higher turnover. 
 
Add GB Auto/CIRA to Egypt portfolio; food names a no-brainer

We add GB Auto to our Egypt portfolio after strong 9M18 results with a continued recovery in the auto business. We also add CIRA, which offers exposure to Egypt’s education sector. We still believe food names (DOMT and JUFO are in our portfolio) are the best theme for 2019, given volume recovery and re-rating potential (mid-teens 2019e P/E (x) vs. 20x for MSCI EM staples). Real estate names offer value, and we prefer TMGH and EMFD. Banks are still posting strong results, with earnings +30% Y-o-Y in 9M18 (we have COMI and ADIB-Egypt in our portfolio). ESRS offers value and EKHO is our favourite materials sector exposure, while SWDY is a quality name that is undervalued at these levels. DSCW offers deep value at 4x P/E (x), but liquidity is an issue. We drop SKPC from our list as we expect sentiment to remain weak on the name following the drop in oil prices. Our Egypt portfolio has outperformed the market by 11% YTD. 
 
Risks remain, but seem more subdued 

Current low valuations and a continuation in EPS growth offer downside protection for the equity market in our view. On 23 September, we highlighted two key risks to our view on Egypt: i) acceleration in global oil prices, which would render the fuel price hike planned next summer too costly from an inflation perspective, thereby risking policy rates remaining higher for longer; and ii) EM/FM volatility leading to faster capital outflows, which could cause more portfolio outflows and higher borrowing costs. With oil falling from USD86 to USD67/barrel, we see reduced risk from higher oil prices – and while EM is not necessarily out of the woods, outflows have slowed recently, and key EM ETFs have taken in cUSD2bn MTD.

Mohamad Al Hajj