EUR 75.96 For Business Accounts Only

Egypt Explained | 2022: External headwinds; Thematic positioning

CBE’s monetary framework helps to cushion global monetary risks. Amid current global inflation dynamics, a hawkish shift in the global monetary stance, and economic volatility stemming from COVID variants, we expect policy rate stability on the view that inflation remains well within the CBE’s target at 7.5% (5-9% target range). We look for local yields to rise progressively during 1H21, on our anticipation of the CBE’s continuous liquidity management (through CLD [Corridor Linked Deposits]) to maintain Egypt’s attractive real yield of 5.7% (measured by the one-year T-bill yield and average expected inflation).

Improving current account and higher debt capacity, a ST breather to EGP. Our FX outlook is unchanged (with EGP weakness seen limited to 3-5%), sustained by the recovery in tourism (USD10bn up from USD4.9bn) and remittances (+10%) in 2022e. Absorption of liquidity, along with sufficient external debt capacity to fulfil the funding gap (room to increase debt by USD10-12bn in FY21/22e), are further reasons why we expect limited EGP volatility this year. We conclude this based on our proprietary cash cover ratio, which is projected to be restored to 1.0x before end-2022e (0.88x, as of Nov-21)—the level required to maintain FX stability. Lower debt repayments of USD5bn vs. 2021, should, in our view, relieve any possible pressure from portfolio outflows, on a lower global carry trade appetite.

Selective positioning; Broad-based rerating hinges on contained inflation. Having significantly underperformed EM since 2017 (-40% cumulatively), Egypt trades on a 2022 P/E of 6.5x vs. 12.2x for MSCI EM. However, while the government’s commitment towards its asset sale programme should stimulate stock market liquidity and ensure favourable policies, low valuations, alone, have proven insufficient to drive a rerating. Nonetheless, we believe Egyptian equities carry strong momentum in five themes this year: i) digitalisation and financial inclusion, ii) robust infrastructure spending, iii) universal healthcare insurance, iv) trade plays, and v) tourism recovery. We only recommend rotation into high beta names (as prime beneficiaries of the long-awaited broader-based rally) by end-2022, once lower yields (converging to policy rates) and possible resumption of an easing cycle begins, as inflationary pressures ease.

Egypt top picks. Banking on these five themes, our highest conviction lies in e-finance, MTI, Ibnsina Pharma, Elsewedy Electric, and Orascom Development Egypt (ODE). We see CIB, Crédit Agricole-Egypt (CAE), CIRA, and Taaleem as low-risk deep value plays to own. Consumer stocks hold deep value, but our real wage model implies that purchasing power will not be restored to pre-currency floatation levels before 2023. Trade plays should also report robust earnings growth, particularly nitrogen fertiliser producers, with urea holding firm at a 13-year high of USD845/t, driven by elevated prices of gas in Europe and coal in China.