Mona Bedeir, Senior Economist
Having maintained the status quo since March’s mega rate cut of 300bps, the Monetary Policy Committee (MPC) of the CBE heads into its seventh meeting of the year today with confluence factors leaving room for all possible options. In deciding on the policy stance, we expect the committee to reckon the impact of (1) the growing risk of the pandemic’s second wave, (2) geopolitical uncertainties on financial market sentiment, (3) inflows into government debt market, and (4) and the speed of growth momentum. As for the domestic scene, we expect the committee to strike a positive note on the impact of the CBE’s lending initiatives and credit easing measures vis-à-vis the performance of other macroeconomic variables. In light of the absence of real inflationary pressures, the major concern for the committee will be how to mitigate the effect of protracted uncertainties of the pandemic trajectory on the speed and robustness of the economic recovery. The strongest hint we got of what might be in the pipeline was from the language contained in the committee’s statements post-COVID-19; it emphasized that it “will not hesitate to utilize all available tools to support the recovery of economic activity, within its price stability mandate, supported by the previous macroeconomic reforms.” That replaced the line where it vowed to “resume [the] easing cycle subject to further moderation of inflationary pressures.” The change in the statement underpins our view that the committee’s actions to leverage its monetary policy to stem the effect of pandemic risks on the economy is not merely about cutting the benchmark rates, given the growing doubt over its marginal effect on boosting economic activity. Thus, we anticipate a “HOLD” decision in today’s MPC meeting.
That said, on one hand, the inflation trajectory is still in favor of easing. July headline inflation eased to its lowest level since November 2019, and core inflation was at historical low record of 0.7%, which is well below the 10-year historical average of 11%. Inflation outlook is still governed by disinflationary forces, driven by (1) weak demand, (2) EGP stable outlook in short term, (3) downward pressures on global commodity prices.
Inflation aside, on the other hand, we still anticipate a “HOLD” decision in view of (1) the recent rebound in lending activity under the umbrella of the CBE’s initiatives in certain sectors, (2) the ongoing geopolitical tension in Libya and the tug of war around the GERD, and (3) the risk of capital reversal on EGP stability. The CBE’s measures to support the private sector lending are still tuning. The committee might consider that it is still too early to assess the effect of the CBE’s lending initiatives as the unlocking of the economy is likely to be associated with a substantial improvement in a variety of near-term growth indicators. This should guide the CBE on the speed and robustness of the recovery to determine the effectiveness of its current measures. Moreover, the headline PMI index rose to 49.6, the closest level to expansion territory since August 2019.
A strong EGP is essential for the CBE to keep inflation expectations well anchored around its target. The EGP was recently boosted by the rebound in foreign interest in the local debt market; foreign inflows climbed by USD3bn in the first two weeks of July. However, the sell-off mode in high-yield EM assets is still sensitive to idiosyncratic global shocks, including the severity of coronavirus and geopolitical uncertainty. Thus, we believe the CBE will opt to maintain its key rates in today’s meeting to get a clearer picture of the market sentiment amid a growing appetite to safe haven assets.
Today’s Trading Playbook
Amr Hussein Elalfy CFA, Head of Research
KEY THEMES
Last night, MSCI EM announced its quarterly rebalancing to the surprise of many market participants without removing any of Egypt’s large-cap stocks in its MSCI EM index. This means Elsewedy Electric [SWDY] will remain part of MSCI EM, and EFG Hermes [HRHO] will not join in—at least for now. We believe MSCI and other major indices rebalancing is a distraction to the market. While adding and removing stocks of these global indices generate inflows and outflows to and from stocks, they also result in mispricing, rendering some stocks unduly undervalued.
POSITIVE
COMI, EAST, SWDY: Back to our valuation tables, we reiterate our view that all Egypt’s large caps that are part of MSCI EM index are undervalued, namely CIB [COMI] (1.8x P/BV), Eastern Co. [EAST] (7.9x P/E), and SWDY (4.5x P/E). This is not to say that HRHO is not; it simply means the inflows that were hoped to kick in will not come as expected, but HRHO still is one of our stock picks in Egypt.
ETEL: Another stock pick that we have long included on our list, despite some company specific events muting the stock performance lately, is Telecom Egypt [ETEL] (5.2x). The company just reported its Q2 2020 results overnight, reporting another set of strong results as expected with double-digit revenue growth and higher operating profit, driven by strong internet traffic. ETEL has proved to be one of the beneficiaries from the COVID-19 fallout.
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