Wednesday 21 February 2018

Egypt enters a rate cutting cycle

So similar to my comments on Turkey, Egypt has had many problems over the last few years, compounded by the fall in the oil price and fall in tourism, two major hard currency earners.

An IMF loan and high interest rates attracting flows seem to have stabilised things. Inflation has peaked and the central bank cut interest rates 100bps this month. The new inflation target is 10-16%, vs 5% GDP growth.

Revenues and volume numbers from both tourism and oil production look like they are picking up.

The balance of trade is picking up off the lows. But what the country needs is a sustained period of cheap currency and domestic investment in manufacturing and job creation.

The country exported less than $1bn in 2016 to China and Germany combined while importing $7.6bn and $5.1bn respectively. Very similar trade balance problem to Turkey. Yet again China and Germany have exported their saving surplusses and undermined the domestic manufacturing base of a country.

The yield curve is also reflecting expectations of compression.

With 5% GDP growth and a double digit inflation target, buying long duration bonds now is really a bet on inflation falling to below target levels.

The stock maket as per the ETF on the other hand has a 25% RoE despite all of these problems and is on a forwards P/E of only 10x.

Looking at the CPI history it has been low before but generally ranged between about 5% and 12%.

If set against a 5% GDP growth inflation falls to high single digits then both the stock and bond markets may perform well.

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