Today’s Trading Playbook
Mona Bedeir | Senior Economist
KEY THEMES
As the Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) heads today towards its last meeting in 2020, we believe the MPC is going to soft-pedal on its dovish stance, opting to hold rates at current levels after the cumulative 400bps cut delivered in 2020. As much as we are optimistic about a global economic recovery in 2021, potential risk factors are still clouding the sky. The deployment of a safe and effective vaccine will be crucial to set the global and domestic economy on a robust recovery in 2021, yet the new mutant variant of the virus started to alter the health risk assessment of both governments and individuals.
Furthermore, inflation remained well below the CBE’s end-of-year target of 9% ± 3% (i.e. 6-12%), and the committee acknowledged that “the outlook for inflation in Q4 2020 is estimated to be in the low single-digit range, with an increasing likelihood of coming under the inflation target floor of 6%”. Despite the acceleration in headline inflation over the last couple of months, inflation expectations (the cornerstone in determining the trajectory of the policy rates) are still muted on the back of the absence of real underlying inflationary pressures. The inflation ticked up in November to its highest level in seven months due to the acceleration in food prices and an unfavorable base year. Thus, we believe that the MPC will lean to pause its easing cycle as:
(1) The impact of the vaccine still takes time to materialize given the need to assess its medical effectiveness, public acceptance, and national distributional capacity.
(2) The CBE should review its inflation target in the medium term and provide greater clarity on its forward policy guidance.
The CBE may opt to resume its easing cycle early 2021 with an expected 100-150bps cut throughout the whole year. In short, we expect an inflation average of 6.3% in 2020 and the CBE to lower its inflation target to 6% ± 3% (i.e. 3-9%).
Positive
Ceramics stocks (ECAP, CERA, PRCL, LCSW): Yesterday’s news of a 3-month import ban on ceramics and porcelain products should provide EGX-listed ceramics stocks with a short-term boost. The list includes (in alphabetical order) Al-Ezz Ceramics & Porcelain [ECAP], Arab Ceramics (Remas) [CERA], General Co. for Ceramic & Porcelain Products [PRCL], and Lecico Egypt [LCSW]. It is short term though because this only fixes one side of their problems, the other being weak demand.