The flotation of the Egyptian pound will play an influential role in determining the attractiveness of shares for investors during 2017, especially after the price of the US dollar increased to more than EGP 19, which will affect companies’ activities and their ability to make a profit.
Financial and technical analysts expect that the most attractive shares for investors in 2017 will include the pharmaceutical and banking sectors, in addition to companies that export their products.
Mohamed Al-Assar, the head of the technical analysis department for investment in North Africa and the Middle East at the National Bank of Kuwait (NBK), said that initial technical indicators show that the EGX30 will continue to achieve record levels near the level of 14,000 points during the first quarter (Q1) of 2017.
From a technical point of view, several shares are expected to achieve price hikes to benefit from the improvement that the Egyptian Exchange (EGX) has witnessed, according to Al-Assar.
In terms of most attractive shares in Q1 2017, Palm Hills shares target the level of EGP 4.5 to EGP 5, Al-Assar said.
He added that Orascom Telecom Media and Technology Holding aims to reach EGP 1.4.
He pointed out that the Commercial International Bank (CIB) shares benefited strongly from the pound’s flotation in November, and still has strong chances to register EGP 120 by the end of Q1 2017.
In terms of financial performance, Ayman Abou Hend, the head of the direct investment sector in the American Cartel Capital Company in the Middle East and North Africa, said that four major sectors will be the most attractive to investors, led by pharmaceutical and food industries.
Abou Hend explained that the pound’s flotation and high price of the dollar has made investment more attractive, and conversely decreased the attractiveness of consumer and industrial sectors, including textiles, clothing, home appliances, and cars. Food companies are excluded from this list.
He pointed out that benefits received by the food sector within the broader segment of consumer companies allows it to gain exceptional advantages, especially as food companies have the ability to pass part of the high food costs (caused by the increase in the price of the dollar) to consumers.
Among the most prominent food sector companies are Juhayna, Domty, Obour Land, Edita, the National Company for Maize Products (NCMP), and Delta Sugar.
Abou Hend added that the pharmaceutical sector is gaining attention this year following the Ministry of Health’s decision to raise the selling prices of medicines, which offset the rising cost of imported raw materials. This sector will continue to receive the same demand without being affected by the decline in domestic consumption.
The pharmaceutical sector includes a number of companies, the most prominent of which are EIPICO, ADCO, Alexandria Company for Pharmaceuticals and Chemical Industries, and Sabaa International Company for Pharmaceutical and Chemical Industry.
Abou Hend said also that the banking sector is one of the most prominent sectors this year, thanks to the huge liquidity the banks collected through issuing certificates with a return reaching 20%, which enables them to use that money to finance the budget deficit or large economic entities.
However, Abou Hend mentioned that the banks are facing difficulties because of the facilitations that they previously offered their customers, which resulted in a deficit of $7bn. The pound was floated before that amount was repaid, which led to a significant price difference between the amounts of money that the companies deposited in pounds before the flotation and the value of the money after the flotation.
The Central Bank of Egypt (CBE) tried to settle that problem through agreeing with the Federation of Egyptian Industries to pay the debts resulted from the differences in the currencies’ prices after the pound’s flotation in instalments of one to three years maximum, according to the situation of each company. The agreement also enabled the ability to fix the dollar’s price at a specific value, upon the request of each company individually, in agreement with the particular bank concerned with the case, and according to the situation of each company.
Abou Hend sees that the financial services sector also will be a winning horse in 2017, because the government’s expected initial public offerings (IPOs) as well as the private sector’s IPOs would stimulate the business of investment banks. Also, during such periods, the brokerage business is expected to experience a steady period.
He added that the financial leasing companies will also benefit, because the banks will be more conservative when it comes to lending to customers, which increases the demands of small- and medium-sized companies for financial leasing, which is known for its flexibility especially with regards to the time needed to approve the requested loan and receive it.
In the same context, the head of the research department in an investment bank that asked to remain anonymous saw that a number of industrial companies which export their products will be among the stocks that attract the most investors, such as Lecico, which exports 40% of its production; Oriental Weavers, which exports 30-40% of its production; and Elsewedy Electric, which has seen an increase in the number of turnkey projects abroad.
He said that it is possible the real estate sector will be negatively affected under the increase in the prices of construction materials, without witnessing a balance with an increase in the income of potential customers. However, there are a number of real estate companies that are witnessing good financial performances, such as Madinet Nasr for Housing and Development, as well as some noteworthy stocks such as Heliopolis Company for Housing and Development.
The department head added that while the consumer goods sector will be negatively affected due to the expected weakness in the size of consumption as a result of the price increases, medicines still occupt a special position and are witnessing high demand, which has resulted in attention from investors.
He also expected the banking sector to see developments that would attract investors, as a result of the increase in default risks due to the harm sustained by the companies’ financial positions due to the pound’s flotation.
This means that the banks will have to restructure themselves, he noted, whether through increasing capitals, creating mergers with other banks, or being subject to acquisition operations.