Smaller pie, bigger slice: Reclassification as a frontier market could prove a salve for liquidity

Silver linings can shine in unlikely places. Although the Casablanca Stock Exchange (CSE) has seen a bit of a rebound following improved earnings reports in the fourth quarter of 2013, in recent years it has grappled with liquidity problems, to the point where, two years ago, daily trade volumes reached all-time lows.

The reasons for this vary. Some point to the CSE’s small pool of listed companies (it has only 76). Others note the large proportion of long-term institutional investors, who tend to hold. The exchange’s options for short-selling are also limited to securities trading.

Improved investor confidence can help address such shortcomings, Amine Amor, president of the Moroccan Association of Asset Management Firms and Investment Funds (Association des Sociétés de Gestion et Fonds d'Investissement Marocains, ASFIM), told OBG. In years past, Moroccan investors got used to high returns, he said, hence they remain extremely cautious following the extended market correction. Perhaps of equal importance is greater international exposure – something that may come about thanks to the recent reclassification of Morocco from emerging market to frontier market by MSCI, an equities analysis firm. This has the potential to stoke investors’ appetites.

RECLASSIFICATION: On November 28, 2013, MSCI moved the CSE from its emerging markets index (EM) to its frontier markets index (FM). Following a decrease in liquidity since 2008, the MSCI said, Morocco’s index is now more in line with the requirements of a frontier market, for both size and liquidity. Indeed, as trading slowed from 2008, the number of Moroccan firms on the MSCI EM fell to only three: Maroc Telecom, Attijariwafa Bank and BMCE. Moroccans initially saw this renaming as a demotion, and feared that it could further harm investor confidence. In fact, it may actually help unlock value in the country and bolster liquidity on the CSE, for several main reasons.

INCREASED VISIBILITY: The first is that, since it was included on the MSCI EM in 2001, Morocco has seen little benefit to begin with. It was given the smallest weighting, amounting to a negligible 0.1% of the index. Since it represented such a tiny sliver of the benchmark, EM fund managers could all but ignore Morocco.

The country’s new position means it has a far more prominent weighting – some 4.7% of the FM index. Moreover, eight Moroccan companies are now represented: Maroc Telecom, Attijariwafa Bank, Addoha, BMCE Bank, BCP Bank, LaFarge Ciments, Managem and Wafa Assurance. Last, it is one of the few countries on the FM index to benefit from an investment-grade rating: “BBB-” by Standard & Poor’s. This, coupled with a prospective rebound in Europe in 2014, from which Morocco (and thus company earnings) would be poised to benefit, the kingdom could emerge as one of the most attractive plays on the FM. The change looks even more advantageous when one considers MSCI data more broadly. All signs point to the increasing popularity of frontier markets, especially with investors looking for higher returns. In 2013, the value of the FM index rose 21.4% year-on-year, while that of the EM fell 5%.

Funds that tend to flow to frontier markets are, to be sure, not at the same level as those for emerging markets. Yet a big slice of a small pie can be better than crumbs of a large one.

The Wall Street Journal indicated that FM equity funds raised $3.4bn in the first nine months of 2013, compared to the $13.2bn raised by EM funds. By way of illustration, 4.7% of $3.4bn suggests $159m of potential investment, as opposed to 0.1% of $13.2bn, which suggests only $13m.

IMPACT: In the two days before the reclassification, the CSE saw record volumes as foreign investors in EM funds exited positions held in Moroccan companies. Aggregate volumes on those two days were Dh1.14bn (€101m), more than 10 times the average for the year. Importantly, as Amor notes, such a high level of trade turnover had only a negligible impact on valuation: the market ceded only 3% over the last month of the year. Frontier funds had yet to take up the positions expected as of the first quarter of 2014. Nevertheles, the new status appears to be in favour of the CSE for 2014.