The first two months of the year witnessed a bullish trend in the local stock market. Sherine Abdel-Razek looks at which traded stocks managed to maintain the gains While 2011 saw the market losing almost half of its strength, with both foreigners and locals abandoning their holdings due to political unrest, 2012 started with a totally new sentiment. The market's main index EGX30 gained 29 per cent in January, followed by another 12 per cent in February, breaking 5,200 points, its highest level in eight months. These 40 per cent gains make the market the world's fastest growing so far this year, according to the Financial Times. The fact that the revolution's first anniversary passed peacefully gave the index its first push, as it meant that political stability was on its way back. Talks about a pending International Monetary Fund (IMF) deal also served to calm fears. Results for the fourth quarter, which were better than expected, also contributed to the improvements. The Commercial International Bank, one of Egypt's largest banks, was among the winners through last week's transactions, after its fourth-quarter net profit fell by a less-than- anticipated nine per cent. Another winner was Telecom Egypt -- despite a 6.8 per cent fall in 2011 earnings -- as analysts praised cost cuts that kept its profit margin flat, in spite of lower revenues. News on progress of France Telecom's deal to buy Mobinil also gave the market an upward push. Most analysts believe it is too early to confirm whether the recovery will last, as it all depends on whether political stability lasts. But experts also agree that certain sectors will likely show resilience, regardless, through 2012. So-called defensive sectors with good potential for growth top the list of recommended stocks. Those include companies whose products are always in demand, regardless of the political and economic situation, such as pharmaceuticals. Local investment bank CI Capital, recently issued a report shedding light on the top picks from different sectors and traded stocks. The favourites named are pharmaceuticals, fertilisers and construction materials. The inelasticity of demand in the pharmaceutical sector makes it the most defensive sector of all. The report notes that increasing medicine consumption, expected to grow by eight per cent this year to reach LE19.8 billion, is one of its strengths. On the other hand, the sector's strength is undermined by government intervention in the medicine pricing system, as well as the sector's vulnerability to changes in exchange rates. This is because 80 per cent of the raw materials used to produce medicine are imported. In January 2011, the government decided to lower the prices of 50 drugs, marking the fourth price reduction since September 2009. Also in 2012, exchange rate difficulties will likely remain but, according to the report, the growing population and the comprehensive medical insurance programme set to be introduced will help maintain solid industry performance. CI Capital recommends investors to buy Egyptian International Pharmaceutical company (EIPICO) stocks. EIPICO is a generic pharmaceutical company, controlling a 6.5 per cent share of the local market with products exported to over 60 countries worldwide. It is a cash-rich company with zero-debt, allowing it to undertake a factory expansion project worth around LE300 million, adding 33 per cent to revenues in gradual increments until 2015. On the other hand, the effects of political and social instability on the construction sector will be mitigated by increasing demand in the Gulf and international markets. The report highlighted both Orascom Construction Industries (OCI) and El-Sewidi Cables as examples of the sector. The two companies conduct around 70 per cent of their operations in export markets. In all, 46 per cent of OCI's backlog is in Saudi Arabia, Qatar, UAE and Algeria. As for El-Sewidi, the GCC represents some 35 per cent of the company's backlog. El-Sewidi's management is reviewing its business plans to dodge the negative side-effects of the Arab Spring, by expanding outside the Arab region. The fact that both companies are involved in other fields of business enhanced their strength. For OCI, rising nitrogen fertiliser prices will benefit the company's overall performance, especially in light of its fixed natural gas costs and growing global manufacturing and distribution network. Meanwhile, El-Sewidi's energy line of business will benefit from the expansion into African countries in this field, with several offerings to supply wind tools and manage wind operations there. Real estate developers were among the hardest hit by the revolution. Factors affecting their decline were the reduction of new construction permits, building materials price rises, the trials of a number of senior managers for companies such as TMGH, Palm Hills and Sodic. But the demographic factor helped balance things out. A high percentage of the population is at marriage age, while the growing number of divorces -- usually accompanied by rising demand on new or old housing units -- is helping the sector stay afloat. In addition, despite instability and high interest rates, mortgage finance posted growth in the post-revolution phase, by 37 per cent in the first half of 2011, reaching LE2.5 billion. In 2012 the real estate sector will be supported by the government's five-year housing plan, which will include offering land in auctions targeting the well-to-do. Also, a vast social housing project in new cities will be launched, tailored for the needs of those with middle and limited income. Out of the real estate sector, it was only Talaat Mustafa Group that was given a "strong buy" recommendation from CI Capital. The fertiliser sector was described as a sector with very high growth potential. Both global and local factors work in its favour. Internationally, it is expected that the drought in northern Europe and excess rain in the US in the 2011-2012 season may negatively affect food supply. In Egypt, the decline in arable land due to illegal agricultural land violations will further push the demand for fertilisers -- especially N-fertilisers, associated with yield enhancement. The sector, however, is still to be affected by the pending change in energy pricing schemes. This sector is the most defensive of all, as it depends on wheat, a strategic commodity and the fundamental ingredient in bread production of bread. Upper Egypt Flour Mills had a strong buy recommendation. It controls the highest market share in fine flour production and is the second largest player in subsidised flour milling. Also, its yield dividend is above sector average. Meanwhile, banks will still have to face some hardships before realising their expected growth potential in the long term. While one of the problems they face is their over-exposure to sovereign debts -- namely treasury bills (T- bills) and bonds -- these supported their income in 2011, and will likely do so too in 2012. Banks are expected to keep their focus on T-Bills, whose yields have steadily risen. In 2011, net interest income generally showed reasonable increases given higher yields on T- bills, while non-interest income remained under pressure. While CI Capital does not rate the leading listed bank Commercial International Bank (CIB), it recommended buying both Credit Agricole and NSGB. That recommendation was based on the former's high liquidity and fast loan growth rates, and the latter's rapid expansion in retail services. Meanwhile, the Housing and Development Bank, which is a player in both the banking and real estate sectors, suffered doubly. Both lending growth and housing units deliveries slowed down. Loans are projected to remain sluggish in 2012, however earnings should make some improvement supported by several expected real-estate deliveries. Investors are recommended to keep their investments in the bank, which was given a "hold" recommendation. Despite the increased demand on building materials soon after the revolution to take advantage of the low cost by building on agricultural land and slums without government approvals, the sector was hardly hit. In cement and with the addition of new production lines and factories, the utilisation rate is expected to decline to 74 per cent, compared to 98 per cent in 2010. Consumption is set to decline by a further two per cent, following last year's eight per cent decline, given lower demand. Export markets are not making up for the local loss, as companies are still trying to regain a foothold in those markets after the long ban on exports ended on October 2010. However, there is potential for growing demand from Libya and Sudan. Another factor that would affect the bottom line of traded cement companies is the increase in natural gas prices by 30 per cent. Sinai Cement turned to using a more expensive source of energy, even before the government decided to lift energy subsidies. This was because the company was unable to cover its natural gas needs, due to recurrent explosions in North Sinai pipeline. The company was given a "buy" recommendation. CI Capital recommends holding the two steel companies it covers in the report: Al-Ezz Steel Rebars and Ezz Al-Dekheila. The sectoral preview showed expectations for a slight recovery in rebars demand by the second half of 2012, with the calming of political unrest. The housing plan expects to bolster demand. Flat steel, too, stands to make gains in 2012, thanks to an expected 16 per cent increase in demand by the automotive industry. Its production is set to reach 102,000 units in 2012, up from 88,300 units in 2011. For Al-Ezz Steel Rebars, expected economic recovery will likely enhance the company's utilisation rate. Meanwhile, current operational capacities remain intact, it will have to pay for the DRI licence it lost last year, and which it then recovered on the condition of paying for it. The company is also facing another legal issue related to the acquisition of Ezz Al-Dekheila.
