February 24, 2020

HC Research: Macro indicators across the board have improved; expect inflation to moderate to an average 7.7%

Norway

Egypt turning into an oil trade balance surplus & tourism revenue exceeding pre-2011 revolution levels.

Our 2020e macro assumptions entail inflation moderation, some further 200 bps policy rate cuts, and EGP stability: With fiscal consolidation now behind us after reaching full cost recovery on different types of octane gasoline, and almost reaching it on diesel in July 2019, we expect inflation to moderate to an average 7.7% for 2020e, which we believe will enable the Central Bank of Egypt (CBE) to cut policy rates further by another 200 bps in 2020. Factoring in our inflation assumptions into our real effective exchange rate (REER) model implies an almost stable EGP with a minor devaluation by December 2020. We positively perceive Egypt turning into an oil trade balance surplus in FY18/19, the first time since FY12/13, tourism revenue exceeding pre-2011 revolution levels in FY18/19, worker remittances consistently recovering since FY16/17, Egyptian treasuries attracting some USD24bn in foreign investments by the end of January 2020, as Egypt’s carry trade remains attractive due to decent 12-month positive real interest rate of 3.59%, based on our calculations. All these factors have strengthened Egypt’s external position and supported the EGP. Although foreign direct investments (FDI) are starting to recover, as well as private investment gaining traction, growing by c76% y-o-y in FY18/19, we see room for further improvement, driving future economic growth, along with private consumption. That said, we remain bullish on the Egyptian economy.

Against this macro backdrop, we stick to compelling stories with limited downside risk, leading to 10 high-conviction picks in industrial, consumer, financials, and select real estate names: Given our macro view, we prefer companies benefiting from a stable EGP, private consumption recovery and a pickup in private investment. This leads us to pick stocks in industrial, consumer and financial sectors, in addition to some select over penalized real estate names. We excluded commodity-linked industrial stocks as end-product prices and spread cannot seem to find a bottom yet. With most of our coverage universe currently undervalued, we stick to 10 high-conviction picks that offer compelling stories with limited downside risk, in our view. Our picks are Orascom Construction in the industrial sector, Eastern Company, EIPICO, Juhayna and Obourland in the consumer sector, Commercial International Bank, ADIB Egypt and EFG Hermes Holding in the financial sector, and TMG Holding and SODIC in the real estate sector.

HC Research Department, HC Securities & Investment