Winners Rise Among Cairo Stocks as Egypt Starts to Cut Rates

• Winners Rise Among Cairo Stocks as Egypt Starts to Cut Rates

Cairo-traded stocks ranging from real-estate to consumer-focused companies, industrials and banks are set to outperform local and emerging-market peers as interest rates drop, analysts and investors predict.

After the Egyptian central bank cut its key rate from a record level last week, investors are likely to scour the stock market to replace returns from high-yielding deposits. Companies will benefit from access to cheaper credit in the Arab world’s most-populous country.

Cairo’s benchmark EGX 30 index has advanced 1.7 percent following the central bank’s 100 basis point reduction in its key rate to 17.75 percent on Feb. 15, the first cut since the currency was floated in November 2016. Since then, the equities gauge has soared more than 70 percent.

Last week’s decision may be the first of several rate reductions as inflation slows, a cycle that will benefit companies “across the board,” says Mohamed Ebeid, joint chief executive officer at the investment bank division of EFG-Hermes Holding SAE. Industrial companies with investment plans will now start putting them into action, said Ahmed Abou El Saad, chairman at Rasmala Egypt Asset Management SAE in Cairo.

Banks

Egyptian lenders are likely to maintain high profit levels as an expected pick up in fees and commissions generated by increased lending offsets a gradual narrowing in the interest margins that have boosted earnings, according to Monsef Morsy, head of financials at the research arm of CI Capital Holding SAE in Cairo.

“This is a sign of the shift in monetary policy in Egypt, which is positive for banks,” Morsy said. “We should expect to see throughout 2018 and 2019 a pick up in loan volumes in working capital financing to the corporate segment, and then we should start to see a pick up in capex lending by the first quarter of 2019, when a further decline in rates and more stability in exchange rates are in place.”

Real Estate

Falling rates mean lower borrowing costs for developers and they have “a direct impact on profitability,” according to Tarek Abdel-Rahman, joint CEO of Palm Hills Developments SAE. It’s also likely that, as keeping cash on deposit becomes less appealing, funds will head to what has proved the favorite investment for Egyptians historically: real estate.

“The cycle of easing is starting and so you would find more cash outside the banking sector,” Abdel-Rahman said by phone from Cairo. “There will be more inflows in the real economy in general, and real estate will take a good portion of it.”

Consumer Stocks

While one cut in interest rates may not be enough for producers to resume expansion plans stalled by high borrowing costs, a cycle of reductions by the central bank would inject optimism into a sector hit hard by the plunge in the value of the pound.

“Cutting the interest by one percent isn’t a game changer, but it is positive to show that the cutting trend has begun,” said Ashraf Sharif, vice chairman and managing director of cheesemaker Obour Land for Food Industries. “When there is a decent fall in borrowing costs, it will help enhance our performance.” Lower rates for deposits will increase liquidity and purchasing power, “which will help create a recovery in the market,” he said.

Industrials

“There are companies that are extremely leveraged and they’ll be able to get refinancing at lower levels,” said Abou El Saad of Rasmala Egypt Asset Management. “Companies working with heavy industries that have strong capex plans will see this is as a catalyst to start putting their growth and expansion plans into action.”

Abou El Saad favors companies “going for expansion” within the industrial and petrochemical universe, because the rate cuts “won’t be a one time event. It actually will boost these companies for years, rather than just a momentum-driven jump.”