December 29, 2019
A curious case: Egyptian equities the better they look, the worse they have performed! Market sanity to return
By Ahmed Sarhan
The Egyptian equity market has witnessed a strong correction since May-2018, with the benchmark (EGX30) losing 27% of its value since. But when you look at the strong fundamentals, low valuations, and a falling interest rate environment it becomes hard to fathom this downward trend.
The 2016 IMF programme reshaped the economy driven by EGP devaluation and subsidy cuts, especially energy-related cuts, which led to inflation rising 59% in 2017-19 (45% in 2017-18). However, the stock market rallied to and rose 124% in a 17-month period, while the Central Bank of Egypt (CBE) continuously hiked interest rates and offered equivalent Certificates of Deposit (CD) with higher yields to counter hyperinflation rates.
The aforementioned events coupled with the slowdown in global growth that started with China and Euro Zone economies and worsened as a result of the China-US trade disputes have hurt the investment and consumption environment. Chemicals and building materials’ sectors took the strongest hit from global oversupply pressuring prices, while locally rising energy prices have pressured production costs, and given a lack of demand producers have lacked the ability to pass on price increases.
The economic reforms started to deliver on the macro front as the government managed to record the first primary budget surplus since the year 2000 in addition to government efforts on mega infrastructure spending, tourism recording the highest income ever in 2019, while nominal GDP is in line of recovery to pre-devaluation level. However, foreign direct investments (FDI) remained at weak levels due to weaker global outlook, capex investments are not either recovering due to weaker demand and high interest rate environment and all in the end resulting to absence of overall demand that was clear in real estate, auto and consumer food names.
Aggregate earnings Real Estate sector earnings are heading to record a 39% drop in 2019, Chemicals 19%, while food sector is recording the weakest bottom line growth of 10% as companies are still struggling to regain pre-flotation volumes and margins.
The global slowdown was seen clearly in the continuous downgrades for growth forecast specially for the EU and China and declining world exports since Dec-2018, which led governments and central banks to step in and stimulate the economy through incentive plans, cutting interest rates and issuing quantitative easing or re-purchasing programs and in parallel the government in Egypt have also stepped in through various measures, cutting interest rates, safe guard measures for steel industries, hiking minimum wage and pensions, cut energy prices for heavy industries (with a promise to revise wider range of prices again in the short term before the scheduled revision) and most importantly the government and the CBE have issued a new incentive package targeting industrial and middle income housing worth USD 11.1bn (c3.7% of GDP) through subsidized loans.
Despite all the downsides we have mentioned earlier, it still doesn’t justify current market conditions with the Year-to-Date (YTD) poor performance, as aggregate earnings for stocks under our coverage in Egypt have managed to record an average growth of 42% since 2015 and are estimated to recover 16% next year while trading on 2016 levels and on a 25% discount to Frontier Markets (ex-GCC) and on macro level still delivering one of the highest GDP growth. Moreover, we believe the recent incentive plans and the upcoming ones that include specialized auto industry incentive and general industrial energy prices review (including electricity), will manage stimulate growth even further, which will eventually lead to multiples expansion.