Research centres define optimal investment portfolio amid high inflation

Fatma Salah
9 Min Read

Uncertainty is increasing in investment markets amid rising interest rates, local currency depreciation, high inflation, and the repercussions of the Russia-Ukraine war, becoming a major concern for everyone. The world is afraid that inflation will reach an uncontrollable limit.

In order to overcome the consequences of increasing inflation, people need to develop the right strategies, in order to invest their money in the optimal way, which requires accuracy and focus on investments that are able to resist recession and inflation.

Global experts unanimously agreed that the US interest will be the reference in determining the lowest and most risky investments in 2023, and based on the US Federal Reserve’s tendency to further raise interest rates, US Treasury bonds will be given the title of “safe haven” in 2023, while the real estate market will be a high investment risk, while they suggested that the riskiest investment in 2023 will be in the world of social communication and crypto.

Amr Al-Alfi, head of the research sector at Prime Securities, believes that the year 2023 has proven that it is not just a year of adaptation at the local and global levels, but that there are now dominant fears that it will be a repetition of the global financial crisis, indicating that the research has identified a “point of view” portfolio that Includes 10 stocks identified by Prime Research, which they consider to be the best in terms of inflation.

He added that the “point of view” portfolio was defined from last year, but with the new variables of high interest rates and the increase in the pace of inflation, 4 new shares will be added to the portfolio, which are in line with 3 main axes: those that benefit from high interest rates, and companies that are eyeing export, and finally companies that have cash positions in dollars.

He indicated that he retained the same ten shares represented in Abu Dhabi Islamic Bank, Commercial International Bank, Education for Management Services, Kuwaiti Holding, Elsewedy Electric, Telecom Egypt, Talaat Moustafa Group, Orascom Financial, Arab Company for Asset Management, in addition to Orascom Construction, while he identified 4 additional shares. They are: Alexandria Container and Cargo Handling, Al-Ezz Ceramics and Porcelain (GEMMA), and EFG Hermes, in addition to Raya Contact Center, to become a “point of view” portfolio that includes 14 recession- and inflation-resistant stocks.

Mustafa Shafie, head of the research department at Arabeya Online, indicated that the best investment in light of waves of inflation is gold, treasury bonds, bank certificates, and stocks benefiting from the movement of the exchange rate as a safe haven in light of economic fluctuations and lack of clarity of vision.

He expected an increase in the momentum of upward inflation in the first half of 2023, and that it would reach peak areas, where the core inflation level is expected to reach levels ranging between 35-40%, while general inflation is likely to reach 50%, which means an additional cycle of stagflation, especially in light of the increase in inflationary pressures. From the increase in the volume of demand during the holy month of Ramadan, the greatest reliance is on importing most of the used materials.

The core inflation rate in Egypt jumped last February to 40.26%, on an annual basis, the highest level in its history, according to data from the Central Bank of Egypt.

Shafie added that there are stocks that will be a safe haven from high inflation, led by stocks that benefit from the movement of the exchange rate of the pound against the dollar, such as the shares of Abu Qir Fertilizers, Ezz Steel, Egyptalum, Mopco, Chemical Industries Holding Company, Alexandria Container and Cargo Handling Company, and Alexandria Mineral Oils Company.

The research department at the Faisal Brokerage Company said that the appropriate investment portfolio to confront hyperinflation is supposed to include companies operating in the field of commodity production, the infrastructure and infrastructure projects sector, and real estate portfolios that have pricing for rents and usage fees linked to annual inflation and their prices are adjusted accordingly as well as grantors of loans linked to variable interest rates depending on the change in prevailing interest rates, with a focus on investing in value stocks and not growth stocks.

The research indicated that the target companies should have large market values or strong brands, and they should operate in important economic sectors and are expected to benefit from state programmes to increase exports.

The recommended stock portfolio included Delta Sugar Company, Telecom Egypt, Abu Qir Fertilizers, Misr Fertilizers Production Company, Egyptian Financial and Industrial Company, Egypt Kuwait Holding, Orascom Construction, Orascom Development, Emaar Misr for Development, Egyptalum, Alexandria Mineral Oils Company, EFG Hermes Holding , Misr Chemical Industries Company, Nahr Al Khair Company for Agricultural Development, Investment and Environmental Services, and Iron and Steel for Mines and Quarries (ISMQ).

The strategy excluded the banking sector stocks from the package of preferred stocks for purchase in the stock exchange in 2023, despite the strong financial performance and profits, which rose strongly for the banks listed on the Egyptian Exchange for their fiscal year 2022, which came due to the depreciation of the Egyptian pound against the US dollar on the one hand, and it also came On the other hand, due to the high interest rates, as well as the strength of the financial positions of the listed banks, the high capital adequacy rates they have and the high rates of non-performing loan coverage they have.

It attributed the exclusion of bank stocks to that in an environment of hyperinflation, the rise in interest rates and the decline in economic growth will decrease the demand for bank loans, default cases will increase, and the risk of irregular loans will increase, which may push banks to increase provisions to face the risk of default, which will be a pressure factor on the results of the banking sector’s business.

The research confirmed that despite the strong financial performance and the profits achieved by banks, the reason for the depreciation of the Egyptian pound against the US dollar on the one hand, and the rise in interest rates on the other hand, increases fears of the possibility of crises, which makes the outlook for the sector during the current year neutral.

The research indicated that iron and steel manufacturing companies were not chosen as preferred stocks for purchase on the Egyptian Exchange in 2023 for several reasons, including that their needs for working capital will rise sharply with the rise in raw materials and US dollar prices, with the possibility of higher energy prices and higher interest rates, which will have negative effects on their activity, especially on the variable interest debt tranche.

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