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CI Capital MENA Compendium | MENA positioning in 2019

External risks balanced against domestic drivers. EM troubles, trade wars, higher interest rates, and downward revision of growth forecasts pose challenges to the MENA region. Domestic investment spending prospects are a positive commonality across our coverage, while consumption is likely to recover faster in Egypt than Saudi. 2018 was a tough year for equity markets, particularly EMs, but 2019 could prove less turbulent, at least for the Egyptian and Saudi markets. MSCI Egypt trades on a 2019e P/E of 7.8x (the lowest in a decade), against EPS growth of 23%, while MSCI Saudi trades at 13.9x (vs. EPS growth of 16%), supported by further capital inflows and a pick-up in economic activity.    

Egypt: Play liquidity beneficiaries and tourism. External recovery and domestic demand should push GDP growth to 5.5% in FY18/19e. We see +USD20bn in BoP inflows this year (15%: tourism receipts) and +USD50bn parked at the CBE as sufficient to meet capital outflows and service external debt. This, alongside consumption growth (1.2% in FY17/18 vs. 5-year average of 4.5%), supports our forecast of a 3% cut in policy rates, starting 1H19. Brent price falling below USD67/bbl removes a fiscal and inflation overhang, assuming slow implementation of fuel indexation beyond 1Q19. CIB and Crédit Agricole Egypt provide the best exposure to the potential credit volume pick-up, while EFG Hermes is set to benefit from an expected rise in EGX turnover and IB activity in 2019. We like TMG and ODE, as both offer mixed exposure to the real estate and tourism sectors.    

Saudi: Domestic normalisation and capital flows. GDP growth will reach 2.4% in 2019e (vs. 2.1% in 2018e). Fiscal spending up 7.4% in the 2019 budget supports non-oil activity, and prioritising investment growth, with 20% in capital spending, is positive for corporates. We forecast an 18% drop in oil revenues from the budgeted SAR662bn, likely to be funded by NFA, government reserves, and further borrowing, to sustain growth. Capital market reforms should bring >USD50bn of inflows, as MSCI EM and JP Morgan bond index inclusions roll out. NCB and Al Rajhi benefit from an improved credit appetite, expected to capture 25% of potential passive flows (post status upgrade). For consumers, SACO and eXtra trade at attractive valuations and are best-positioned to capitalise on the displacement of unorganised players.  

Bottom-up calls. In Egypt, we favour Juhayna (deleveraging and strong restructuring returns), Oriental Weavers (2018e div. yield of 14.3%, highest in coverage), Cleopatra Hospitals Group (efficiency improvements, strong organic growth, and M&A potential), Elsewedy (cross border expansions, superior returns, and undemanding valuation), and Abu Qir (best fertilisers play in terms of size and growth). In the UAE, we like ENBD (deep value ahead of FOL hike) and Emaar Development (highest yield among GCC coverage at 12% with strong visibility through 2020e). Mouwasat is our pick in the Saudi healthcare sector (well-managed BS and growth). Humansoft and QGTS trade on cheap valuations, offering unique exposure to Kuwait’s undersupplied education sector, and Qatar’s LNG capacity expansion, respectively.