The pound has already broken through the significant LE6 to the dollar level, and resources available to support it are getting scarcer (Photo: Retuers)
Investors are advised to make new positions in the Egyptian market, but mainly to focus on stocks with strong fundamentals but "over-penalised by the political noise", a report issued by leading Cairo-based investment bank Beltone Financial indicated Wednesday.
The report, entitled "MENA 2012 Strategy and Outlook: Cloudy with a Chance of Sunshine," said that Beltone upgraded Egypt's recommendation for 1Q2012 to neutral from underweight. It indicated that the upgrade was induced by the positive prospect resulting from parliamentary elections.
With selectivity being the key theme in Egypt, the report indicates that fundamentally attractive stocks within different sectors are the most advisable. These stocks include Orascom Construction Industries (OCI), Juhayna, GB Auto, Talaat Mustafa Group Holdings (TMGH), Telecom Egypt and the Commercial International Bank (CIB).
However, the report's expectations for Egypt remain cautious as the "economic scene continues to face challenges". Equities, nonetheless, still offer fundamental value at current levels, the report reads, though the fruits of these are not apparent due to investors' low risk appetite and low fund inflows.
The report explained that Egypt's economic misfortunes are headlined by weakening growth, increasing unemployment and lack of investment. The fiscal deficit is widening and the costs of financing the deficit are rising.
Private consumption, Beltone indicated, could act as a buffer to an economic meltdown, but external aid is necessary to compensate for the lack of much needed investment to "jump-start the economy and solve most of the current challenges".
Egypt has rejected a $3.2 billion loan from the International Monetary Fund (IMF) citing unwillingness of the ruling junta to widen the country's foreign debt. Officials, however, have recently announced that the loan is currently being reconsidered as local borrowing is drying out.
According to the report the broad macroeconomic challenges facing the Egyptian economy may still cloud the performance of stocks, even if these challenges do not directly affect companies' performance.
Among macroeconomic challenges are:
- Potential depreciation of the Egyptian pound: The pound has already broken through the significant LE6 to the dollar level, and resources available to support it are getting scarcer.
- Changes in tax policy: Egypt has already increased the tax rate from 20 per cent to 25 per cent in an effort to finance the government deficit. Companies such as Ezz Steel and Mobinil have justified deteriorated financial performance in 2011 partially due to the increase in tax rates.
- Land issues: Real estate giants such as Talaat Mustafa Group and Palm Hills Development have been bogged down in court battles over land acquired under the Hosni Mubarak regime.
- Inflationary pressures: Inflation accelerated in November, with urban consumer prices climbing to 9.1 per cent in the 12 months to November, up from 7.1 per cent in October. The Central Bank cited inflationary pressures when it raised its key overnight rates for the first time in two years.
- Labour strikes demanding higher wages: A law incriminating strikes was issued earlier in the year, but the government continues to loosely apply it. Labourers in major Egyptian firms, including landline giant Telecom Egypt, have engaged in labour unrest and have warned of a general strike.
- Possibility of import restrictions: With pressures mounting on Egypt's foreign currency reserves, which have shed $2 billion a month in November and October, some economists indicate that enforcing trade and capital restrictions might be a viable option for Egypt to protect the pound from plunging.
- Possibility of reviewed energy subsidies to industrial companies: Many voices have been calling to remove energy subsidies to firms, especially that many receiving these funds achieve above international average profit margins. The cabinet has already approved a plan to cut the subsidies as part of an austerity plan to reduce the budget deficit by LE20 billion ($3.3 billion), but a final decision will need the approval of the ruling military council, a source at the Ministry of Finance told Ahram Online.
- Access to bank credit: The government's heavy borrowing from the local market has pushed yields upward to the highest levels in three years. Average yields on nine-month and one-year bills have reached 15.34 per cent. Beltone also highlights that asset quality is a concern facing credit availability in Egypt.
- Concerns on nationalisation: Recent court orders have ruled to annul contracts of four companies privatised in the Mubarak Era on claims that sale deals were corrupt. The government has challenged the court orders, but the extent and the mechanism of the government's repossession of the companies remains unclear.
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