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CI Capital MENA Positioning | Our 2021 strategy

Reset our outlook to pre-COVID-19. Our expectation for EM’s performance in 2021e is broadly the same as early-2020, albeit coming from a drastically different base year. We anticipate EM to benefit from the low interest rate environment, possibly weaker USD, and expectations of gradual recovery in global trade amid relatively more constructive trade negotiations expected between China and the US’ new administration. A prerequisite for the outlook is achieving further positive developments in terms of approving, manufacturing, and availing COVID-19 vaccines early on in 1Q21. MSCI EM has been underperforming since 2018-to-date (c10% vs. c30% for MSCI WI), and currently trades at a c25% discount to MSCI WI.  

2021 key macro themes. We do not see a unified macro theme across our MENA coverage. Egypt: Look for convergence of treasury yields to market rates, as of 1H21, a key trigger for unleashing the economy’s long-awaited potential. The broad-based consumption story is expected to resume, as the real wage gap closes, following a one year delay caused by the COVID-19 outbreak. Potential pick-up in tourism and structural reforms to stimulate private sector activity, as part of the IMF’s current programme, would lend further support to consumption. UAE: The recovery in trade dynamics, expected lift-up of travel restrictions, removal of FoL in onshore companies, and Expo 2021 support our positive outlook on UAE. Saudi: Expect 2021e to be a better year, but the implications from COVID-19 would spare Saudi two years to restore its growth path. Kuwait: All eyes on the potential debt law, which we see as a breather not a trigger, amid potential application of consolidation measures.

Favour UAE and Egypt. Both UAE and Egypt markets trade at undemanding valuations (12x and 7x, respectively), and have been significantly underperforming peers since 2017. Strong correlation between the market and trade activity, and the expected pick-up in institutional/foreign participation would support the rerating of UAE and Egypt markets, respectively. Financials and real estate/tourism stocks represent the bulk of our top picks for 2021. We balance our positioning with an exposure to the Saudi market, given its size and liquidity, through NCB and eXtra, while confining the representation of the Kuwaiti market to NBK. 

Value stocks at the core of our positioning. Earnings momentum is key theme for our top stocks (30% y-o-y growth in 2021e, excl. SABB). Direct tourism plays (ODE and EMG) offer the highest earnings growth in 2021e. Egypt financials and real estate (CIB, EFG, SODIC, and TMG) are positioned to benefit from normalisation of market rates and pick-up in capital markets. UAE banks and real estate (DIB, ENBD, and Aldar) offer top exposure to UAE’s improving macro. We look for consumption normalisation in Egypt (MTI, OLFI, and AUTO), while play industrials through EKHO and OC. We also include a couple of growth stocks in our portfolio for diversification (CIRA and IDH).