EFG Hermes, an investment bank, asset manager, and securities brokerage which operates across the Middle East and North Africa (MENA) “substantially” increased Egypt’s weight in its MENA model portfolio at the end of 2022, Kitchen says.
Gulf markets had performed very strongly since 2020 thanks to high oil prices and very low interest rates, he says. The devaluation of the Egyptian pound, US dollar weakness, and some positive growth surprises in the global economy “create a better context for Egypt.”
The Egyptian pound has halved in value against the dollar over the last 12 months. The government reached agreement with the International Monetary Fund in December for a $3bn loan, and moved to a more flexible exchange rate regime as part of the package. Currency devaluation “creates an opportunity for a strong economic recovery in Egypt that can drive strong stock market performance,” Kitchen says. “Egyptian stocks are not expensive.”
He points to Egyptian-Kuwaiti Holding as a company which can benefit from devaluation due to revenues from its energy and fertiliser operations. The company posted a 44% increase in revenue for the first nine months of 2022, driven by fertilizers and petrochemicals. The company says about 75% of its revenues and net profit are either based in or linked to the US dollar.
In the longer run, Kitchen says, the snackmaker Edita Food Industries, which trades on the London and Egyptian stock exchanges, is a well-run company which should be able to pass cost increases on to customers and see solid earnings growth.” The company increased its net profit by 2.5 times in the third quarter of 2022, helped by a 40% increase in export sales.
The Egyptian stock exchange gives an overall market price-to-earnings (P/E) ratio of 8.2, and 9.2 for members of the EGX 30 index. Egyptian-Kuwaiti Holding has a P/E of 6.1, while Edita is one of the most expensive stocks on 23.9 times earnings.
Privatisation clarity needed
Some investors question whether Egypt’s macro environment is yet stable enough. While the country has a good financial ecosystem, currency instability remains a “big issue,” says Warren van der Merwe, managing partner at Vantage Capital, Africa’s largest mezzanine fund manager. Higher US interest rates have led to a lot of “hot money,” being withdrawn from Egypt, he adds.
Deirdre Maher, head of frontier markets at Amundi in London, is evaluating possible investments in Egypt but agrees that “there is still some concern” over currency instability and inflation. She sees Kenya as a safer bet for now.
Joe Delvaux, distressed emerging markets fund manager at Amundi, says that clarity is needed on how plans for the privatisation of Egyptian state-owned enterprises will be carried out. Such sales “can drive liquidity out of the local market,” he says. “We still need to see the implementation.”
Kitchen argues that now may be time to swim against the tide, with lack of confidence in the Egyptian market meaning that value may be available. Egypt’s banks, he says, are “making good money today because of high interest rates, but would also see good loan growth if government policies lift private sector investment.”
The economy is still under stress, with inflation and import shortages particular challenges, “but the global economic environment seems more favourable this year than last,” he argues. “Institutional equity investors lost faith in Egypt in the past five years,” Kitchen says. “This creates a basis for strong future performance.”
Currency and privatisation uncertainties mean that even for frontier-market investors, Egyptian equity exposure is not for the faint hearted.
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