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CI Capital MENA Positioning | Our 2020 strategy

Overweight Egypt. Following the closure of the 3-year IMF programme in Nov-19, we see 2020 as a transitional year for Egypt, as a synchronised improvement in supply (CBE releasing excess liquidity, further rate cuts) and demand (real wage recovery) for liquidity would finally materialise. Against this backdrop, Egypt trades at the most undemanding valuation among MENA peers (2020e MSCI Egypt P/E is 10.5x, on 20.1% EPS in 2020-21e, an unjustified discount of 28%). We advise investors to start building positions in Egypt equities in 1H20, expecting the potential increase in market turnover and capitalisation (current market cap-to-GDP stands at 14% vs. 35% historical average), in line with our macro outlook. Top sectors are banks, real estate/tourism, and construction, as liquidity beneficiaries. We also like consumer, as activity normalisation is expected in 4Q20. We will monitor industrials, as further government support or easing trade tensions would be a key trigger.

Selective stock picking in the GCC. We flag off-budget spending as the key theme in Saudi. We view this as positive primarily for the construction and entertainment sectors, which have minimal representation in our coverage, and expect it to limit the downside of the market from the currently demanding levels. Both Kuwait and the UAE lack strong macro triggers, and our positioning in both markets mainly hinges on a potential increase in capital flows. Kuwait will benefit from the upgrade to MSCI EM in May-20 (USD2.5-3bn of expected inflows, 3.5% of current market cap). The rerating of the UAE market, likely to happen in 2H20, is conditioned on the increase of FOLs.

Top calls. Banks represent the heaviest weight among our picks. CIB, CAE, and EFG are best to capitalise on improving credit activity and liquidity in Egypt. Al Rajhi and SABB provide a proxy to the potential lending pick-up, with limited downside. NBK and ENBD are our main calls, on trading flows. Egypt real estate (Emaar Misr, ODE, and TMG) offer the highest upside. Emaar Dev. offers the highest yield, while Mabanee is a solid play on Kuwait’s stable market. Real wage recovery strongly supports Egypt consumers (Juhayna and Domty), while market consolidation in Saudi remains key for eXtra, along with the overlooked consumer finance venture. EKH is a beneficiary of deregulation within Egypt’s gas and power markets. OC is a play on improving cash flow at an attractive valuation, while Jazeera Airways’ earnings growth is among the highest in our GCC picks, with room for upside. CIRA, CHG, and Rameda offer strong exposure to Egypt’s high-growth education and healthcare sectors.

Risks to our thesis. With no foreseen Fed rate cuts, the main catalyst for DM equities in 2019, we expect to see capital rotation in 2020 into EM equities (trading at a c20% discount to DMs, a 10-year high). That said, we flag geopolitical tensions in the MENA region and/or setbacks in the US-China trade negotiations as key risks to our base case. We calculate that a 1% rise in discount rates across our forecast horizon would lower the valuations of our top picks by an average of 10-12%, ceteris paribus.