Top picks?

Few companies might escape the expected nose dive when the market opens. Sherine Abdel-Razek takes a look at the performance of different sectors

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Another week passed with the market transactions suspended. The market has been closed since 27 January amid fears that the uncertainty surrounding the uprising might weigh down on its main index which lost 17 per cent during the two sessions following the start of demonstrations on 25 January. Another factor that made the bourse's closure inevitable is the Central Bank of Egypt's decision to close banks for four days last week following a number of in-banks demonstrations, to object the wage policies or the high managerial practices, paralysed the sector. The stock exchange is linked to banks for the settlement of the transactions. Banks resumed their activities on Sunday and the bourse is said to start later this week.

Rehab Taha, analyst at Prime Securities, believes the red colour will dominate market transactions when the bourse reopens and that it will be volatile for a while.

Moreover, very few if any companies would survive the expected meltdown, according to Tamer Ismail, head of sales at Cairo Capital Securities. "Talking about identifying top picks, or companies that might float over the loss waves is nonsense right now. As a whole, some sectors might be luckier than others, but across the board, incurring losses is inevitable," he said.

Both Ismail and Taha agree that amid the uncertainty following the revolution and the vague fate of tens of businessmen who are the executives of heavyweights in the market, negate the possibility that the blue chips might survive the nose dive. Added to this is their belief that the recent initiative by Egyptian citizens to subscribe in investment fund certificates by LE100 per investor will not help a lot. "So far, this initiative gathered less than LE100 million, a very small amount compared to what is needed." said Ismail. The market lost LE70 billion of its capitalisation on 26 and 27 January.

The market regulator announced earlier this week several measures regulating market transactions to limit capital flight and losses. This includes reducing the trading time to three hours, from 10:30am to 1:30pm. Trading on stocks will be halted for half an hour in the event of a five per cent change in value. If the change reaches 10 per cent in value, the price will be fixed until the end of the session.

Oil and gas is the only sector that seems to be gaining from developments. "The sector is expected to boom in the coming period mainly driven by higher crude oil prices which exceeded $103 per barrel. In addition, as a result of hiking oil prices, the stretching of exploration and production projects worldwide is expected to increase, coupled with oil supply dependent companies benefiting from soaring oil prices," said a note issued by Prime. The two main players in the sector are Maridive for Oil Services and Alexandria Mineral Oils Company (AMOC).

The defensive sectors of the economy, those that produce necessary indispensable goods or services like food, medicine, fertilisers and telecommunications are neutrally affected. "No matter what happens in the country, people still eat, take their medicine and make phone calls," said Taha.

The undoubtful demand on the production of those companies would hedge them against the negative effect of turmoil despite the fact that some of them would shoulder losses.

The Organisation for Economic Cooperation and Development (OECD) estimates that the telecommunication's sector lost $91 million in revenues during the suspension of services in the early days of the revolution. In addition, some branches of TE Data, Mobinil, Vodafone and telecom services companies such as Ring were looted. According to Prime, the losses will be offset by strong network usage coupled with the large population base and promotions offered by operators.

As for the banking sector, it is in a good position, according to Ismail, though it faces many risks. In spite of a strong liquidity position with loan to deposit ratio at 55 per cent, a panicking attitude by savers is expected to lead to the outflow of funds, and both deposits and loans would grow at almost one third Prime's previous estimates.

Other areas of risks faced by banks are loans given to companies led by entrepreneurs facing charges, namely Ezz Group, Talaat Mustafa Group (TMG) and Palm Hills. "Total loans given to the three companies amount to LE13.6 billion or three per cent of total loans in Egypt," according to Prime whose note, however, underscore the fact that "this risk is limited as these loans are guaranteed by the corporation, rather than the entrepreneur."

Arab African International Bank, National Société Générale Bank, CIB are the main listed lenders of the three companies.

The tourism sector is severely hit with Taha expecting outbound tourism receipts to be slashed to $7.5 billion compared to $11.6 billion in 2010, backed by the tendency of some countries to deport citizens of Egypt. Taha believes that the Egyptian Resorts Company (ERC) will be one of the most hardly hit by the blow especially that there are a lot of question marks about the fate of its chairman, Mohamed Abul- Enein, who is one of 17 businessmen the stock exchange decided to freeze their codes, that is to bar them from any selling and buying activities on their shares.

As for the real estate and building materials sectors, they will be by far the largest losers. In addition to the fact that the three big players of the sector, TMG, Palm Hills and SODIC, have their heads under investigation, the demand on new homes is to wane through the coming period. High income level is assumed to follow a wait-and-see strategy. On the other hand, the real demand which streams from middle and low income level is supposed to decline by 17 per cent year on year, to 345,757 units. Moreover, selling prices are predicted to decline by 10 to 20 per cent due lower demand.

Moreover, the automotive market sales would drop by almost 10 to 15 per cent in 2011, down from a prior growth expectation, due to the effect of expected higher interest rates on car loans, and the fact that the depreciation of the Egyptian pound will raise the cost of vehicles for automakers and assemblers. Ghabbour (GB) Auto is the largest assembler in Egypt.