“I wouldn't say that Egypt was different or special in any way,” he said in a telephone interview, arguing that the issues affecting emerging markets globally were the same as those impacting Egypt.
“We're talking about rising U.S. interest rates, trade tensions, global growth concerns, the stronger U.S. dollar and there was, of course, the fourth quarter sell-off in U.S. equities,” said Hafez.
“From a country perspective, things were pretty solid. There wasn't really any major change or negative news flow coming out of the country, maybe with the exception of some hike in inflation. And accordingly, maybe a slower-than-anticipated cut in policy rates.”
Monsef Morsy, co-head of research at Egyptian brokerage CI Capital, said there were local factors that also influenced Egyptian stocks.
“We had expected the Egyptian market to trade sideways in the second half of the year, which was the case up until November,’ he told Zawya in a telephone interview, noting that the market then plunged from late November after the government announced plans to alter the way banks were taxed.
These changes, which are still to be ratified, would have raised banks’ average effective tax rate to 40 percent from 30 percent, had they been applied to 2018 earnings, EFG Hermes wrote in a November note.
“This also took its toll on the market,” said Morsy, citing the performance of Commercial International Bank (CIB), the largest listed bank, which fell to 68.50 Egyptian pounds ($3.88) per share on December 6, from 82 pounds on November 18, according to Eikon data.
The stock market slump also temporarily derailed the government’s plans to sell off minority stakes in state-owned enterprises. In early 2017, it said it would list stakes in 23 companies, a move aimed at both boosting government revenues and bolstering the bourse. The process was due to begin with the secondary listing of stakes in five companies, but this was shelved in October.
In terms of market performance, the worst-performing listed company last year was Arab Cotton Ginning, which split off its land holdings into a separate company in June and reduced the size of its share capital. Its shares fell 54.7 percent.
Ringing in changes
Global Telecom also ended the year in a slump after its main shareholder – Dutch telco Veon – had to withdraw an offer for the 42 percent of shares it didn’t own after missing regulatory deadlines, and a subsequent bid to buy the company’s assets in Pakistan and Bangladesh also failed. Global’s shares rebounded in January on news that Veon had offered Global Telecom a $100 million funding lifeline and would take the company private.
Many of the other poor performers in 2019 were real estate companies, which CI Capital’s Morsy said suffered as capital flowed out of the property market.
He said that although most developers produced “decent numbers” in contracted sales, ebbing liquidity led to concerns about future sales.
Harshjit Oza, vice-president of research at Shuaa Capital, said in a telephone interview that many developers also focused on the premium end of the market which “was getting saturated”.
Egypt’s high interest rates – deposit rates closed the year at 16.75 percent, and lending rates at 17.75 percent – have hiked borrowing costs, both for construction firms and property buyers.
“There are still investors, but you can see that because of the high interest rates, the cost has gone up so much that the developers are finding it difficult to maintain the same kind of profitability and the same margins,” said Oza, highlighting that developers often have to offer units through five or 10-year payment plans due to the lack of mortgage availability in Egypt.
“Mortgages are less than 1 percent of GDP,” said Oza.
Morsy said he expects the real estate sector to rebound once interest rates start to fall.
Rates of interest
Most analysts seem to think rates will ease, given the recent decline in inflation - in December, headline inflation dropped to 12 percent, from 15.7 percent in November and is now less than half that of July 2017’s record high of 33 percent. Uncertainty remains as to how quickly cuts will be made and to what extent – in January 2018, annual inflation was 17.1 percent, falling to 11.4 percent in May only to then surge to 17.7 percent in October, before declining again.
CI Capital is forecasting a rate cut during the first half of the year. Morsy said the cut does not need to be substantial, just enough to signal that the central bank has resumed monetary easing.
That case has been helped by reports that the flood of money flowing out of the country at the end of 2018 has not only been stemmed, but reversed. Last week, Egypt’s Central Bank reported that it had sold 1.16 billion Egyptian pounds worth of five-year Treasury bonds – all of which were snapped up by foreign investors, according to Reuters.
Brokerage HC Securities & Investment is less bullish about the timing of potential interest rate cuts, even if it is upbeat on the prospects for Egypt’s economy. While it believes interest rates could fall by as much as 500 basis points once monetary easing recommences, it does not expect this to happen until 2020 “given high global and local inflation levels and the expected subsidy cuts toward the second half of this year”, the company’s research department said in response to questions from Zawya.
However, Renaissance Capital’s Hafez said that just as the decline in Egyptian equities last year was linked to emerging market momentum, the prospects for both now look much brighter.
“For 2019, our global strategist and head of research expects a better year for emerging markets, and accordingly for Egypt. The reason for this is we're seeing much lower U.S. bond yields.”
Hafez cited the U.S. Federal Reserve’s more “flexible” stance on monetary policy, and hopes that the U.S.-China trade dispute could be solved as two of the main reasons why investors may be more willing to take on risk, as well as the fact that many emerging market currencies now look cheap.
“Egypt is one of our over-weights from a strategy perspective. We do like the economic reform plans, we like the IMF-backed programme, the government is pressing ahead, and generally speaking we are positive about the country. It's trading at a forward P/E of 8.3x - that's 15 percent below its long-term average of 9.7x,” added Hafez.
1. CITADEL CAPITAL: 175.97%
2. IBNSINA PHARMA: 24.39%
3. EGYPT KUWAIT HLD: 22.05%
1. ARAB COTTON GINNING: -54.70%
2. PORTO GROUP: -52.46%
3. GLOBAL TELECOM: -48.62%
(Reporting by Michael Fahy; Editing by Matt Smith)
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