Cool under pressure: In a tough period for emerging markets, Morocco remained stable

The year 2013 was one of ups and downs for emerging market equities. With the financial crisis showing little improvement in Europe, uncertainty over the US Federal Reserve’s quantitative easing programme, and tensions continuing apace in the Middle East and North Africa, the economic forces acting on Morocco were little disposed to show a buoyant performance.

The Casablanca Stock Exchange (CSE) certainly grappled with some of those exogenous pressures, hitting a five-year low at the end of August, when the Moroccan All Shares Index (MASI) dropped to 8356. Yet the market subsequently rallied over 9% to reach 9114 at year-end. Gains were especially notable in the month of November following the publication of stronger-than-expected results from a number of listed companies. Performance in early 2014 has already begun to show promise, with the exchange up 3.4% year-to-date and up 6.8% year-on-year (y-o-y) as of May 2. As the year progresses, the reclassification to a frontier market by MSCI and the successful initial public offering (IPO) of the Jorf Lasfar Energy Company (JLEC) in December 2013 could continue to serve as catalysts to turn around the fortunes of the MASI in 2014.

SLOWER DIP: For most of 2013, the CSE followed a similar trend to prior years, with an underwhelming performance from Morocco’s listed equities over the first three quarters. The MASI, Morocco’s free-float, value-weighted index comprising all 76 listed companies, eased downwards for the third consecutive year, ceding 2.6% in 2013. The decline was, however, markedly slower than in 2012, when the MASI fell 15.3%. This indicated the prospect of a potential turnaround in the near term, although the CSE remained one of the worst performers on the continent, ahead of only Tunisia, where the TUNINDEX fell 4.3%. Morocco’s markets were once again plagued by low volumes, a lack of IPOs and concerns about the wider economy.

It is not all doom and gloom, however. MASI market capitalisation was still Dh450.8bn (€40bn) in early January 2014. The top five listed companies by market capitalisation were telecoms provider Itissalat Al Maghrib, at Dh85.3bn (€7.6bn); Attijariwafa bank, at Dh62.2bn (€5.5bn); BMCE Bank, at Dh38.9bn (€3.5bn); BCP Bank, at Dh33.6bn (€2.9bn); and the cement producer Lafarge Ciments, at Dh22.2bn (€1.9bn).

SECTOR PERFORMANCE: While overall market performance in 2013 was muted, a number of sub-segments saw prices rise over the course of the year. Ten of the MASI’s 22 sectors delivered positive share price performance, notably hotels and leisure, up 73.9% y-o-y; utilities, up 29.2% y-o-y; and distribution, up 12.6% y-o-y. The hotels and leisure segment, represented by a single stock, Risma (which manages Morocco’s largest hotel chain), benefitted from strong earnings growth due to the completion in 2012 of its entry-level hotels (Ibis Budget) and from a 9% uptick in tourist numbers to Morocco, which boosted hotel occupancy rates through October 2013. The top three sectors, however, account for only 3.4% of the MASI, limiting the gains seen by the market as a whole.

By the same token, the three worst performing sectors accounted for only 4.4% of the index. These were forestry and paper, down 34.5% y-o-y; electrical and electronic equipment, down 28% y-o-y; and mining, down 16.2% y-o-y. Some firms in these sectors suffered from high financing expenses, a rise in energy costs and strong competition in the local market.

The drag that moved the index thus came from the middle. Performance lagged in the three sectors that together comprise nearly 40% of the MASI: construction and building materials, down 6.1%; real estate, down 7.9%; and telecommunications, down 9.5%. With public spending on the construction of large-scale infrastructure easing, sales of cement – a key barometer for activities in construction and real estate – were down 20.8% y-o-y in the first quarter of 2013 and 4% in the second quarter. Company results followed suit.

BACKGROUND: Established in 1929 as the Office for Clearing of Transferable Securities, the CSE is one of the oldest stock exchanges in North Africa and among the few in the region with no restrictions on foreign participation. Since its inception, the CSE has progressed significantly, mostly keeping pace with the evolution of international finance markets and products. Key reforms include: the creation of the Financial Markets Authority (Conseil Déontologique des Valeurs Mobilières, CDVM) in 1993 following the relaunch of the CSE as a private institution to ensure investor protection, and its subsequent membership of the International Organisation of Securities Commissions, which regulates the world’s securities markets; the launch of a new electronic trading system in 1997; the creation of a national central securities depository, Maroclear, in July 1997 to manage elements such as settlement, securities transfer and payment and to minimise operational risk; and the launch of the new MASI and MADEX indices in 2002, followed in 2004 by the adoption of the floating-weight capitalisation method for calculating indices. Trading is reported electronically each day to both market participants and international data vendors such as Reuters and Bloomberg, and the market remains one of the most sophisticated and open on the continent. The CSE’s recent performance and modest capitalisation has shifted it from the MSCI Emerging Market index to the MSCI Frontier Market index, although this may bring some benefits (see analysis).

In 2013, a law was passed to reorganise the regulator, so as to give it clearer goals and more responsibility. Therefore, the CDVM is currently undergoing a transformation into the Moroccan Capital Markets Authority (Autorité Marocaine du Marché des Capitaux, AMMC). The AMMC’s new prerogatives ensure the complete independence of the institution and encompass the entire capital markets sector, from stocks and shares to forward markets and pension operations. The authority will also be able to create new functions in the market and grant professional cards to financial analysts, portfolio managers and intern controllers, with a view toward professionalising all job categories. The sanction scheme has also been revised and reinforced.

INVESTOR PROFILE: Morocco’s stock market is dominated by institutional investors, namely insurance companies and pension funds. These are long-term investors that typically hold shares in excess of three years. Other investors in Morocco include investment funds and high-net-worth individuals (trading mainly through their banks). Though data for 2013 was unavailable as OBG went to press, CDVM’s annual report indicates that in 2012 institutional investors comprised nearly 70% of share purchases and 63% of share sales.

Foreign holdings in Morocco’s stock market fell by 20.1% in 2012, from Dh147.7bn (€13.1bn) in 2011 to Dh118.1bn (€10.5bn) at end-2012. At constant 2011 values, however, foreign holdings declined only slightly, to Dh145.5bn (€12.9bn). Of the 4560 foreign investors present in Morocco’s stock markets at the end of 2012, 90.7% were European, and 77.2% were French.

Investors in Morocco are typically conservative and, as short-selling is not permitted on the CSE, tend to trade in a rising market. Thus, as markets have trended downward over the past few years, trading volumes on the CSE have plummeted. After falling 41% in 2012, data from the CSE indicates that the traded volumes (shares and fixed income) for 2013 totalled just over Dh62bn (€5.5bn), a 2% increase over 2012. In terms of actual transactions, however, these continued to decline sharply, falling 28% to 156,984 in 2012.

Average daily volumes finished at Dh108m (€9.6m) for 2013, from Dh118.4m (€10.5m) in 2012 and Dh139.6m (€12.4m) in 2011. Total traded volumes received a boost from an IPO launched by JLEC, an energy firm, in December. IPO volumes were up 81% y-o-y, to Dh1.7bn (€150m) and volumes almost doubled in the block over-the-counter market, up 59% y-o-y to Dh26.8bn (€2.4bn), due primarily to TAQA’s acquisition of JLEC from a number of offshore entities and Danone’s acquisition of National Investment Company’s 37.8% stake in Centrale Laitière. However, volumes on the main central market, which makes up nearly half of trade, continued to fall: down 13% to Dh28.6bn (€2.5bn).

COST TO THE INVESTOR: Besides a 0.1% exchange fee on trading shares, traders typically add a 0.3% custody fee, while commission has been freely negotiable since 2004. Commission on bonds is 0.005% and is capped at Dh5000 (€444) per party to the transaction. Value-added tax on services is 10%, and capital gains tax is set at 15% after being reinstated in 2006. Dividends received by non-resident shareholders are subject to a 15% withholding tax, but this can be reduced under tax treaties between Morocco and numerous countries.

BOOSTING AWARENESS: As with many emerging economies, one of the chief challenges to boosting churn and participation in Morocco’s capital markets, particularly on the retail side, is a lack of awareness. As a result, there has been a push in recent years to improve information and education on both the benefits of trading to retail investors and the benefits of listing to small and medium-sized enterprises (SMEs).

Morocco ranked 24 out of 28 countries in Visa’s 2012 International Financial Literacy barometer, prompting a spate of efforts to improve financial literacy. One prominent example is the Moroccan Foundation for Financial Education, established in March 2013, which is in the process of rolling out its 2013-15 plan. According to Hiba Zahoui, deputy director of banking supervision at Bank Al Maghrib, the programme focuses on SMEs and micro-enterprises. The foundation works with the various institutes such as the National Agency for the Promotion of SMEs to educate such businesses and micro-enterprises on financial products, how to use them and the associated risks.

Efforts also continue to ensure the quality of available financial advice. Hicham Elalamy, deputy general director at CDVM, highlighted that the market reform law adopted in March 2013, under which the CVDM was renamed the AMMC, establishes an accreditation system for individuals carrying out certain functions in financial institutions under AMMC supervision. This accreditation will only be granted following successful completion of training and proficiency tests.

LISTINGS: Elsewhere, efforts are aimed at increasing the number of companies listed on the CSE. Following the listing of JLEC at the end of 2013 and the delisting of both Branoma and SOFAC, 76 companies were on the MASI roster at the start of 2014. The biggest portion are banks, which make up 37% of the MASI.

JLEC, a private electricity company majority-owned by Abu Dhabi’s national energy company, TAQA, was one of the biggest listings on the CSE in years. The company listed 2.2m shares, or 9.5% of its capital, for Dh447.5 (€39.75) per share at the end of December. Demand for the stock was 6.7 times over-subscribed, with 40% of the shares reserved for Moroccan institutions, 25% for foreign institutions and 32% for individuals, according to the CSE. The firm’s listing is the first since Afric Industries in January 2012, and the largest since Alliances in July 2008. The year 2014 certainly has the potential to see a handful of new listings. In its annual market review, BMCE Capital selected Marsa Maroc and SADET as potential IPOs for 2014.

As with many countries in the region, one challenge to encouraging new listings is that many large firms in Morocco are owned by private holding groups, hence few are properly structured to qualify for entry. A further difficulty is that as many as 95% of Morocco’s registered companies are SMEs, a segment that is so far under-represented on the stock market. A project is underway to establish an alternative market for smaller companies similar to the NILEX exchange in Egypt, subject to the ongoing amendment of law 1.93.211.

In the meantime, various authorities are offering smaller firms a number of incentives. The CSE subsidises IPO expenses, including legal and financial advice, of up to Dh500,000 (€44,450). The government, meanwhile, offers a 50% rebate on the 30% corporate tax rate for the first three fiscal years after an IPO. Lastly, the conditions for foreign companies to launch an IPO will be simplified, according to Elalamy. At present, any foreign company seeking to issue securities in Morocco must obtain special authorisation from the finance minister; under the new plan, the minister will set a pre-authorised ceiling per operation within the limits of a pre-defined global annual maximum, thereby rendering the listing process quicker and smoother.

CASABLANCA FINANCE CITY: One of the chief objectives of Morocco’s economic development policy in the past five years has been to increase the country’s links with African markets. This forms part of a broader plan to build the country up as a potential gateway for foreign investors targeting sectors in West and Central Africa (see Economy chapter). One of the most fê ted aspects of this push is the CFC, which looks to attract new investors with a host of turnkey facilities, a raft of fiscal incentives and a critical mass of financial services. It officially opened in 2013. By the end of that year, Asma Charki, senior tax manager at Mazars, told OBG, some 30 companies had secured CFC status.

The privileges of this are many. One is exemption from corporate taxes for the first five years, and a reduced rate of 8.75% thereafter, instead of the normal rate of 30% (and 37% for credit firms). In the same vein, the headquarters of foreign companies with CFC status are taxed at only 10% of profits or 5% of operating expenses, whichever is higher (or in event of a loss, the latter). Even employees benefit, paying income taxes of 20% instead of 38% for a maximum of five years.

FIXED INCOME: Fixed-income markets slowed in 2013, with issuance down for most products. According to BMCE Capital, issuances of corporate bonds more than halved, from Dh5500m (€487.9m) in 2012 to Dh2250m (€199.6m) in 2013. Issuance of certificates of deposit by banks fell from Dh36bn (€3.2bn) to Dh32.3bn (€2.86bn), while those by credit institutions plummeted from Dh3214m (€285m) to Dh40m (€3.6m). Such marked decline was due in part to lower demand (see Banking chapter) and in part to slightly higher rates.

As for treasury bonds, BMCE’s Morocco bond index (MBI) gained 3% y-o-y, finishing at 174.35. With the exception of the long-term MBI, which fell by 1.3%, all indices saw a positive performance. On international markets, having raised its first dollar-dominated bond in December 2012 for a total of $1.5bn, Morocco raised another $750m in May 2013 by re-opening the same notes. Given the over-subscription of these bonds and Europe’s gradual economic recovery, in early 2014 Morocco signalled an intent to issue €1bn in Eurobonds.

VENTURE CAPITAL & PRIVATE EQUITY: Africa has seen a big jump in private equity (PE) and venture capital (VC) activity in recent years. The reasons range from the appeal of double-digit returns in a low-growth world to the need for better access to financing for start-ups and SMEs. Morocco has a lengthier history with both types of capital than do most of its neighbouring emerging markets. VC first came to Morocco in 1992, and has since developed organically. In 2000, the industry’s organisation improved with the establishment of the Moroccan Association of Capital Investments ( Association Marocaine des Investisseurs en Capital, AMIC).

As of the end of 2012, there were 20 active capital investment funds in Morocco. Assets under management (AUM) have grown at an impressive rate, climbing from only Dh1bn (€89m) in 2000 to more than Dh9bn (€800m) in 2012 (and 140 companies in portfolio). Indeed, 2012 was a record year for capital raised – some Dh1.9bn (€168.7m), or nearly quadruple the Dh480m (€42.6m) raised in 2011. About 65% of these funds came from international development agencies such as the World Bank or the European Bank for Reconstruction and Development, and 47% came from cross-regional funds (those with pan-African investments). Some Dh307m (€27.3m) was invested in a total of seven companies in 2012.

Funds raised are generally invested over a period of five years, notes Françoise Giraudon, managing director of AMIC. Moreover, in the past SME owners were wary of outside investors, but difficulties gaining access to credit are making them more amenable to the idea. Of the investments made in 2012, the biggest beneficiary (44%) was manufacturing and industry – a change from the previous two years, where the construction, services and chemicals industries dominated. In terms of divestments, given liquidity issues in the market, there were only 12 exits in 2012 for a total of Dh148m (€13.1m), compared to Dh360m (€32m) in 2011. The average length of investment exited was 5.2 years, up from 4.5 years in 2011, while the aggregate return on investment delivered was 16%.

Under Law 41-05, which governs PE and VC, funds with the status of a “VC organisation” (organismes de placement en capital-risque, OPCR) benefit from tax advantages, notably an exemption from capital gains tax. However, according to Giraudon, although four funds have so far gained this status, only two companies – Private Equity Initiative and Brookstone Partners – actively manage OPCR funds.

The investment conditions stipulated in the law can be stringent. Among the amendments proposed to loosen these is to expand OPCR criteria from requiring 50% of funds to be invested in SMEs to requiring 50% investment in non-listed companies. Though the changes have not yet been approved, many hope they will be in 2014. If adopted, they would enlarge the investment playing field and drive an increase in both the number and amount of VC funds in Morocco.

NEW INSTRUMENTS: A number of reforms in the pipeline for 2014 look set to widen the universe of instruments allowed in Morocco. Chief among them is a new law permitting securities lending. Though adopted in February 2013, for this law to enter into force the finance minister must approve a model securities lending contract. Under the provisional calendar, Moulay Hafid Elalamy, the minister of industry, trade, investment and the digital economy, indicated that the pro forma contract, with its related rules to be set out in a CDVM circular, should be in place by June 2014.

In addition, a law on Islamic financial services (IFS) was approved by the cabinet in January 2014, and now awaits parliamentary approval. With IFS still fairly limited in North Africa, regulators are hoping to attract sharia-compliant capital, and with good reason. According to research by the Malaysia-based International Islamic Financial Centre, the global market for sukuk (Islamic bonds) had issuances of $85bn in 2011, $131bn in 2012 and $83bn as of October 2013, bringing total AUM to $1.7trn. Growth in the sukuk industry, at a compound annual rate of more than 50% for a decade, is expected to continue (AUM is forecast to reach $3.4trn by 2018), spurred by high yields and growing interest in IFS across the globe. If the law is approved in 2014, the Moroccan Association of Participative Financiers told Bloomberg, total investment in sharia-compliant products in Morocco could reach $7bn by 2018.

OUTLOOK: With the economic climate in Europe looking fairer, the outlook for Moroccan companies’ earnings should start to improve. Following results in the third quarter of 2013, which beat expectations, other indicators should start to tick up as well, especially as the global economy begins to strengthen, albeit gradually. While this should bolster investor confidence, domestic reforms will improve Morocco’s allure with a host of new instruments and incentives. After JLEC’s listing in 2013, many other firms could follow with their own IPOs. Morocco’s reclassification to the MSCI Frontier Market index could boost new investor’s appetite for Moroccan stocks, as the country benefits from a larger weighting. This, coupled with the expected new securities law, could serve to boost liquidity on the CSE.

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The Report: Morocco 2014

Capital Markets chapter from The Report: Morocco 2014

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