Morocco’s illiquid market

Casablanca is trying to inject some much-needed life into its underperforming stock exchange, burdened by downgrades and disillusioned investors. Published in MEED, 4 December 2014

The Casablanca Stock Exchange (CSE) is suffering from an image problem these days. Two influential indexing companies have downgraded its status over the past year, retail investors are steering clear of the market and even institutional investors are not trading very actively. The question remains whether there is anything the authorities can do to turn things around.

The first index downgrade was announced in November 2013 by the US’ MSCI, which said it was demoting the Moroccan bourse from emerging market to frontier market status. That was followed in November this year with a similar move by the US’ S&P Dow Jones Index.

Both were a recognition of the fact that the CSE is small and illiquid. The stock market is the seventh-largest in the Middle East when measured by market capitalisation, but trading levels are low. The Egyptian Exchange, the next largest in the region, has a market capitalisation just 12 per cent greater than the CSE’s, but the value of shares traded in Cairo is almost three times higher.

For the past three years, Casablanca’s main market index, the MASI Flottant, has ended the year lower than it began. It has staged something of a recovery this year, climbing above the 10,000-point mark in late September for the first time since June 2012, but there have been no initial public offerings (IPOs) yet in 2014 and only one apiece in 2012 and 2013.

The stock market authorities are not trying to hide the problems. Karim Hajji, CEO of the CSE, says boosting liquidity “is the major challenge on our exchange” and acknowledges that a lot of retail investors have become disillusioned.

“Most of our investors are institutional: pension funds, insurance companies, mutual funds and so forth,” he says. “They account for more than 70 per cent of total trading volumes. Individual investors used to be quite active before 2008, but they have deserted the market since then because it has not been performing well.”

The nature of the investors that dominate the market are contributing to the low levels of liquidity. “The people who hold most of the shares are institutional investors and they have no reason to sell the stocks because they need it for long-term investment,” says Hajji. “They’re not selling, they’re only buying.”

However, the CSE is now making a concerted effort to inject a little more life into the moribund exchange. At the centre of its plans is a cooperation deal with the London Stock Exchange (LSE), which was signed in June.

Included in the deal is the adoption of the LSE’s Millennium IT technology platform, which allows a far wider range of asset classes to be traded, encompassing equities, fixed income, derivatives and commodities. London and Casablanca will also work together to promote this technology to neighbouring countries, something that could help with Morocco’s wider ambitions of establishing Casablanca as a financial and business hub for north, west and central Africa.

The deal with the LSE also includes a plan to boost liquidity on the Casablanca bourse by targeting small-to-medium-sized enterprises (SMEs). Hajji points out that SMEs account for 60 per cent of Morocco’s GDP and provide half of all jobs in the country. This part of the economy could provide a steady stream of companies wanting to raise money by listing their shares and, with that in mind, the CSE plans to launch an education programme targeting SME managers next year, based on a scheme already launched by the LSE in London and Milan.

Further on down the line, Hajji says the CSE would like to launch new products such as real estate investment trusts (REITs), which bundle together real estate deals for investors to trade like shares, and exchange-traded funds (ETFs), another type of vehicle that tracks stock market indices.

The exchange has also been lobbying the government to sell shares in more state-owned enterprises to give investors more places to put their money. The low number of IPOs in recent years is a sign that both the government and the private sector need convincing over the merits of floating on the stock market. That being said, there is one IPO planned for December: real estate firm Residences Dar Saada. Hajji says he expects at least three IPOs to follow in the early part of 2015, but he suggests there should be room for far more to follow.

“Local companies could use the capital markets to raise more money,” he says. “Currently, banks provide about 90 per cent of lending. We need to have an alternative to bank financing.”

One candidate among the state-owned sector is port authority Marsa Maroc, which the government has said it plans to float, although a date has yet to be set for the share sale. Hajji says there are advantages for the government in selling stakes in far more firms.

“The government has scarce resources,” he says. “It cannot provide all the funds needed by the state-owned enterprises while at the same time building infrastructure and catering to social needs such as hospitals and schools. The government cannot do everything, so what we are saying to the government is this: why don’t you let state-owned companies raise funds through the capital markets? I think they are responding now. I think they are listening carefully.”

The noises coming from senior members of the government appear to back up this cautious optimism. At an event in London on 22 October to promote Morocco as an investment destination, Mohamed Boussaid, the country’s minister of economy and finance, said the government was looking to the finance industry to support its wider policy aims.

“The Moroccan financial sector … is expected to play a full role in financing the sectorial strategies launched by [the government], especially in the vital sectors of energy, industry, logistics and services with high added value,” he said.

Boosting liquidity is a chicken and egg game of needing both more companies to list their shares and more investors to trade in them. So the efforts to provide more investment options on the market will only work if they can be matched with more investors coming to the market with their money.

On one level at least, it looks like there is untapped demand among local institutional investors. At the moment, the limited investment options in the market mean most Moroccan fund managers hold a very small amount of their portfolios in equities. “If you look at their portfolios, in our estimates, only 11 per cent of assets under management are held in Moroccan equities,” says Nikhil Rathi, head of international development at the LSE.

According to him, the key reason for the low number is a lack of available investment options on the market. “If we can get over that hurdle, I think we will find there is huge appetite both in the Moroccan market and in international markets to invest in Morocco,” he says.

Some investors are likely to remain wary, however, given the relatively high price/earnings (p/e) ratio on the exchange. The overall p/e ratio last year was just above 16 per cent, which is higher than on other North African stock exchanges, such as the Egyptian Exchange, where it was 15.2 per cent, or the Tunis Stock Exchange, where it was 14.4 per cent.

Hajji acknowledges that some investors see the market as too expensive, but insists relatively few stocks are overvalued. In any case, regulatory changes that are in the pipeline could soon help to drive prices down to more attractive levels. The CSE has been working with the government to change the regulations to allow international investors to lend and borrow securities. This will allow them to ‘short’ a stock, in effect placing a bet on a company’s share price falling.

“We did not have instruments to correct valuations quickly, such as ‘shorting’ and so on, so it’s taken ages to correct the valuations and some people still think the market is overvalued,” says Hajji. “I’m not of that opinion. Many stocks are not overvalued, in fact most stocks are not, but the perception is different.”

The reforms being enacted on the CSE fit in well with what is happening in its surrounding neighbourhood. Casablanca Finance City (CFC), the business hub where the bourse is located, is also trying to expand and attract more companies as it tries to push ahead with the government’s strategy of establishing Morocco as a hub for companies doing business in Africa.

The CFC was recently ranked at 51 out of 83 financial centres in the Global Financial Centres Index compiled by UK-headquartered Z/Yen Group. That is relatively low, but it still marks a significant jump from 62nd place in the previous index and it also means Casablanca is second only to Johannesburg in terms of African financial hubs.

The CFC Authority’s CEO, Said Ibrahimi, says the business environment it is creating could yet have a wider impact on the Moroccan economy and business environment.

“The financial centre can contribute to job creation and could add some points to GDP growth,” says Ibrahimi. “[The CFC] can also be used as a forcing device, a model to help push through some other economic and institutional reforms for the country as a whole, and to reduce bureaucratic procedures.”

That is a long-term strategy and it is too soon to know how successful it might be. Similarly, the reforms being pursued by the CSE will take time to have an impact. How long remains to be seen, but there ought to be benefits for investors and listed companies alike if it is successful.