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MENA strategy | Fed to potentially shift dovish; Positive for MENA banks and realtors; Egypt stands out

Possible Fed rate cuts and sideways oil market shape outlook for our coverage. The Fed’s latest statements and market consensus point to a potential shift to monetary easing. However, improvement in US macro data and global trade talks could change the timing and magnitude (25bps cut estimated on 31 July) of the rate cuts. This should bode well for our MENA coverage, triggering a strong liquidity cycle, drop in the cost of borrowing, and reversal of flows to EM from DM, we believe. A relatively stable oil price outlook, in line with the extension of production cuts for another nine months by OPEC+, would favour Egypt, and push Saudi and Kuwait to become more aggressive in their efforts to stimulate non-oil GDP growth.

Tamed inflation + global easing = High conviction on Egypt’s domestic story. The single digit headline inflation reading of 9.4% in Jun-19, along with a high base effect of 2018, should keep July and Aug-19 inflation below the upper range of the CBE’s target. The CBE will likely assess the first and second round inflationary impact from the recent energy price hikes, especially amid volatile food prices that could temporarily propel inflation. We have a strong conviction that two consecutive cuts are key to signal a confirmation of the monetary easing starting, which we expect to take place in Aug-19. Against this backdrop, we expect Egypt’s current risk metrics would ensure a sustained inflow into the debt market compared to other EMs.

Egypt banks best positioned; Lower rates a relief for UAE lenders. We favour banks with higher positive repricing gaps. This would draw on: i) high retail lending, ii) locking in fixed, high-margin income, and iii) tighter liquidity, implying low exposure to investment income. A low share of CASA deposits would imply alleviated pressure on NIMs, as rates ease. In the GCC, UAE banks stand to benefit most, given the potentially lower funding constraints and overall pressure on margins. We like CIB’s positioning as a top beneficiary of the easing cycle in Egypt, DIB on a high positive repricing gap (+16 months), Al Rajhi on strong retail lending (75% of total book), and KFH on its high utilisation (LTD at 94%) and retail exposure. EFG Hermes is also a play on lower rates (higher trading volumes in Egypt, 50% of brokerage income).

MENA real estate a strong beneficiary of lower rates. For Egypt’s real estate, lower interest rates should have a positive impact on the market, on: i) lower cost of funding, ii) increased value of developers’ receivables, and iii) improving demand for the sector. We believe a cut in rates could be the first major catalyst for the GCC real estate market, primarily in the UAE, as lower interest rates would imply: i) lower cap rates for recurring income-generating assets, ii) potentially lower mortgage rates in the UAE, iii) increased attractiveness in rental rates vs. the risk free rate, creating demand for residential units, and iv) lower funding costs further, supporting Saudi REITs through their expansions. We flag TMG, PHD, SODIC, Emaar Dev., Emaar Malls, and Derayah REIT as key beneficiaries of lower rates.