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Egypt strategy | EM sell-off – Egypt in context

EGX-30 underperforms MENA markets. The current pressure on emerging markets (currencies and equities) has been taking its toll on our coverage since last May, triggered by concerns regarding capital outflows, potential monetary tightening, and possible FX issues. Among our coverage, Egypt witnessed the strongest sell-off (-19.4% May-to-date vs. an average of -2.0% for MENA peers), given the relatively higher foreign participation in the market (10% of government securities [tradeable bills and bonds], as of Jul-18, and 25% of EGX in 2018 y-t-d). This coincided with the recent disclosure of NFAs at Egyptian banks, which turned negative for the first time since April 2017. From a sentiment perspective, the sell-off was also aggravated by two domestic incidents, namely the resurfacing of a stock market manipulation case, and a court order to seize the assets of businessmen affiliated to Muslim Brotherhood.

Turkey – further drag on EMs? Monitor local treasury yields. We believe Turkey currently has a high weight in the region’s overall risk profile, as investors await policy makers’ actions towards deep economic issues stemming from alarming external private debt levels, which led to a 50% depreciation in the TRY in 2018 y-t-d. Turkey’s current economic metrics show that the short-term outlook remains challenging, and could possibly require providing the market with higher premiums on the FX and/or interest rates, in order to attract more inflows in government debt, a key source of FX in the short-term. We acknowledge that a scenario of further TRY depreciation and a tighter monetary policy would likely have overall negative repercussions on the EM universe, especially in light of the global trade wars and higher USD.

Spillover still contained. Egypt’s macro indicators currently remain broadly stable, with CA/GDP narrowing to 2.3% in 9M FY17/18 (vs. 5.3% in 2017), inflation falling to 14% from a peak of 36% last year, and GDP growth reaching 5.4% for the first time in 3 years. This should continue to lend support to our expectation of the resumption of monetary policy by end-2018 (the main trigger for the market). That said, it is important to closely monitor the developments for EM peers, particularly in Turkey, as further deterioration in the latter’s macroeconomic conditions (further pressure on the TRY and higher rates) would carry some weight in Egypt’s monetary policy, possibly adding pressure on the stock market over the short-term.

Maintain defensive strategy. We expect the EGX to trade sideways until end-2018, and remain highly correlated with any negative developments across EMs, particularly with the market’s low level of trading liquidity. Against this backdrop, we reiterate our recommendation of confining exposure to defensive sectors (healthcare), stocks (low sensitivity to interest rates, currency volatility and global commodity cycles), and high dividend plays. We also note that further sell-off would present some opportunities in high beta names.