Surprise surprise, look who is rising phoenix-like
By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
Even though Egypt was the best performing global emerging market in 2018, MSCI Egypt trades at a valuation of 9.8 times earnings, a 25% discount to the MSCI EM and frontier markets. I believe Egypt is still undervalued relative to its dramatic macro turnaround and the sheer growth potential of its banks, healthcare firms, construction companies and LNG exporters (the Zohr gas bonanza has only just begun!). For instance, only one-third of Egypt’s 100 million people has a bank account, the Nile Valley has one of the world’s highest population density since Pharaonic times (when the state capital was Thebes centuries before Al Fustat!), stellar demographics and urbanization ratios. A fall in inflation to IMF targets or below 10% will lead to a fall in bank non-performing loans (NPL’s), rise in credit growth margins and earnings. Egypt’s commercial banks are de facto growth stocks.
Egypt’s growth momentum is definitely on an upswing. Fiscal year 2018 GDP growth was 5.3%, up from 4.2% in fiscal 2017. The World Bank expects Egypt to boast 5.8% - 6% GDP growth in 2019 and 2020. Tourist arrivals increased 40%, their highest since just prior to the Tahrir Square protests that culminated in the resignation of President Mubarak in January 2011. Egypt has also imposed a 14% VAT and cut fuel subsidies while FX reserves have risen to $45 billion or nine months import cover. Fiscal consolidation has not repressed economic growth, though the budget deficit is still high at 8% of GDP. Inflation has fallen from 30% just after the devaluation to 12% now, this enables the central bank to cut rates, a steroid shot for construction and credit growth. A managed float foreign exchange regime and the prospect of Egypt as a net gas exporter will continue to attract GCC and Western capital.
The IMF demanded a draconian 50% devaluation of the Egyptian pound in November 2016 from 8.7 to 18 against the US dollar. Yet the Egyptian pound is now one of my favourite emerging market currencies, the most undervalued in MENA/EMEA. The central bank’s reserves have swelled to $45 billion, up from $16 billion at the time of the devaluation. The black market is kaput. The current account deficit has narrowed to 3% of GDP as tourism, Suez Canal tolls, LNG exports and remittances rise. Egypt can access the Eurobond market now that Fitch has raised Cairo’s sovereign credit rating to B+ with a stable outlook. In addition, Kuwaiti, UAE and Saudi central banks have deposited US dollars in the Central Bank of Egypt (CBE).
As inflation falls, as the Zohr gas field boosts exports, I can easily envisage the Egyptian pound to appreciate to 16 to the US dollar. This is the solid rationale why several London/New York hedge funds I know own Egypt one-year Treasury bills with a 17% yield in local currency.
Egypt President Abdel Fattah el Sissi has won a second term that will allow him to remain head of state till 2023. A referendum on a constitutional amendment to allow him to remain in power till 2030 is in process. Sissi has forged financial, political and security partnerships with Washington, the EU, Russia, Israel, China, Saudi Arabia, Kuwait and the UAE. He has implemented IMF mandated subsidy cuts that had eluded even former Presidents Anwar Saadat and Hosni Mubarak. Egypt’s role as the geopolitical pivot of the Arab world has given the Great Powers, Saudi Arabia and UAE a strategic stake in the stability of his regime.
After all, Egypt has largely overcome its own security threats in the Nile Delta/Sinai and partnered with its GCC allies in the Red Sea and Libya. True, Egypt is impacted by unrest in Sudan and Algeria but the stability of the military-bureaucratic elite that has held power since the July 1952 Free Officer coup against King Farouk is remarkable – and reassuring for global investors.
The news that the US will no longer extend waivers to eight countries that purchase Iranian crude oil exports (China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece) from sanctions imposed by the Trump White House is highly bullish for the Saudi stock market, my favourite Big Oil (Chevron, Total) and Permian Basin shale drillers (Pioneer National) shares. Brent is now up 35% in 2019 to $74 after a horrific fourth quarter plunge. Venezuela, Iran, Algeria and Libya demonstrate that the risks to global oil supply ratio is rising. The oil market will run out of spare capacity as Iran’s oil exports fall to “zero”, Trump’s policy objective. This means that the White House will increase pressure on Saudi Arabia to boost production at a time when Russia is complaining about lost revenues and loss of market share due to its output cut pact with OPEC. For now, Mideast geopolitics means $80 Brent is not unthinkable in another hit to global growth.