The signs investor are looking for — a conversation with Simon Kitchen, managing director and head of strategy at EFG Hermes Research
Coffee With: Simon Kitchen, managing director and head of strategy at EFG Hermes Research. Simon Kitchen (LinkedIn) leads on strategy, economics, and index-related research in the MENA region for our friends at EFG Hermes Research. He’s also responsible for the bank’s MENA top 20 portfolio. Simon joined EFG Hermes in 2007 and has more than two decades of experience as a MENA analyst and economist.
Looking ahead amid EFG Hermes’ One-on-One Conference in Dubai: We sat down with Simon on the sidelines of EFG Hermes’ flagship conference last week to talk about the challenges facing the Egyptian economy, the signs investors are looking for when it comes to the government’s privatization program, and his top picks and predictions for the wider region. Below are edited excerpts from our conversation.
ENTERPRISE: There’s plenty of talk right now about the Madbouly government’s privatization program, which is aiming to see through stake sales in some 32 state-owned companies over the next year. How do you think the privatization program is impacting foreign investors’ outlook on Egypt?
SIMON KITCHEN: From a foreign investor’s point of view, they’re waiting to see execution on these sort of asset sales, because it’s something that Egypt has talked about for a while, but investors aren’t prepared to take things on faith. They want to see things sold and for the public sector to pull back. If we were to see a couple of proper asset sales in the next three months, that would really help.
E: What do you think the long-term impacts of the privatization program could be for the Egyptian economy?
SK: One thing that’s striking when you compare Egypt to other smaller emerging markets is that you’ve still got quite a lot of the banking system in state hands. If that was to change and private sector banks dominated the banking system, that would affect the overall complexion of the economy. It should mean more credit potentially being given to private sector businesses, rather than this phenomenon of crowding out that you’ve had in the past, say, five years. That could be quite a transformation.
E: Which state asset sales do you think we’re likely to see movement on soon?
SK: Of the major state banks, the most likely to see a transaction soon would be Banque du Caire. That’s been talked about on and off for 15 years.
E: Another key pillar of the government’s economic reform program is its efforts to boost FDI and exports. What’s your assessment of the potential to really boost FDI to Egypt and exports from Egypt? Which sectors do you think are the most promising?
SK: Energy and green hydrogen are quite promising. Egypt is fortunate because of its geographical location — good sun, good wind along the Red Sea, and then the position straddling the Suez Canal means you’re able to export hydrogen either east or west. I think the renewables program — while a bit of a late starter — has been quite successful. Then you’ve got a lot of existing infrastructure, on fertilizer production for example, that can be used for hydrogen exports.
Auto is another sector that’s been talked about for a while, but it’s a bit trickier. The size of the Egyptian market makes it quite attractive for auto manufacturers to set up — they could address the local market and export to the Gulf, the Eastern Mediterranean, or to Africa. But you need to get past big macro issues, like the stability of the currency and disruptions to imports. You need to credibly get past that before you can become a big site for that sort of automotive development.
E: A majority of respondents to EFG Hermes Research’s 2023 One-on-One Live Poll in Dubai thought MSCI’s EM stock index will outperform the S&P 500 in USD terms this year. Is that a reflection of optimism that EMs are set to see better conditions and more growth potential than developed markets this year?
SK: On balance, the emerging market index will probably perform better than the US, but I wouldn't expect massive outperformance. It's a tricky one because the performance of the emerging markets index is a function of US interest rates. Part of the reason that index did really well from October last year until February this year was because people thought that the US would stop raising rates. Now they’re less sure about that because inflation's stubbornly high in the US.
When big EMs like China, Korea, and Taiwan do badly, the GCC tends to do quite well. I think that will continue this year — perhaps the GCC does a little better than EMs in general for the rest of the year. The Chinese economy is opening up this year, but it’s still got some structural issues that mean it's not going to grow really well and the growth target they've set themselves is quite low.
The big EM funds are still very underinvested in the GCC. It accounts for around 7% of their benchmark weight, and yet these funds have in aggregate maybe 2% of their money in the region. They've historically thought the GCC is not so important, that these are not real emerging markets. Something of that sentiment lingers, but when it's 7% of your index, you have to take it a bit more seriously. It's an area that they've sort of neglected in the past and now they're realizing they need to pay it a bit more attention, and that can be quite supportive.
E: Which countries and sectors are investors at the conference excited about?
Saudi Arabia is probably the most promising. You see slow progress towards the Vision 2030 goals that the Saudi government has outlined, regulatory changes that are fairly favorable, more women coming into the workforce, and net migration picking up, so that's pretty positive. Obviously the Dubai economy is booming as well, but it's harder to find ways to invest in those Dubai stories.
This time last year, people were excited about the big Saudi banks. I think now they're more excited about smaller companies — consumer companies, for example — or healthcare, or insurers. Supermarkets and food producers will also continue to do really well.