Reforms are under way in Morocco to return liquidity and listing activity to pre-financial crisis levels

The Casablanca Stock Exchange (CSE) was off to a good start in 2016, which has also seen the largest initial public offering (IPO) to take place in Morocco in eight years. However, the CSE’s all-share index remains below pre-financial crisis levels, as do IPO and trading activity more generally.

To revitalise the exchange, the market authorities have been working on a range of reforms including changes to its ownership and the planned launch of several new markets and products. The latter efforts will be facilitated by the imminent inauguration of a new trading platform that the CSE purchased from the London Stock Exchange Group as part of a wider partnership between the two that is set to boost the market’s future development.

Equity Market

As of July 2016 there were 75 companies listed on the CSE, with a combined market capitalisation of Dh512.9bn (€47bn), of which foreign investors held approximately one-third. This figure was up from Dh453.3bn (€41.6bn) at the end of 2015, which in turn was down from Dh484.4bn (€44.4bn) at the end of 2014. In the years since 2012, capitalisation levels have been broadly stable, hovering between year-end totals of Dh445.3bn (€40.8bn) and Dh484.4bn (€44.4bn). However, levels remain substantially down from a pre-financial crisis peak of Dh692.5bn (€63.5bn) hit in March 2008. The largest sector by capitalisation is the banking industry, which accounts for 32.9% of market capitalisation, followed by telecoms at 21.8%, construction and public works at 15.8% and real estate at 3.4%.

The biggest three firms by capitalisation were telecoms operator Maroc Telecom (MT), with a market cap of Dh111.8bn (€10.3bn), Attijariwafa Bank at Dh70.42bn (€6.5bn) and fellow bank Banque Centrale Populaire (BCP) at Dh40.3bn (€3.7bn). Another bank, three construction materials firms, an insurer, an electricity utility and a real estate developer make up the remainder of the 10 largest firms by capitalisation.

Listings

June 2016 saw the first (and only, at the time of writing) IPO, by state-owned port operator Marsa Maroc. The government floated a 40% share of the firm on the local bourse, valued at Dh1.9bn (€174.2m), which made it the largest Moroccan public share offering by value since that of real estate firm Alliances Immobilier in 2008. The company was listed on the CSE on 19 July; interest in the sale was high.

The Marsa Maroc IPO followed two public offerings in 2015, namely that of a 15% stake in fuel distributor Total Maroc, in a transaction worth Dh719.04m (€65.9m), and a Dh180m (€16.5m) offering in insurance broker AFMA. Both were oversubscribed, at rates of 6.7 and 7 respectively, indicating continued strong demand for new securities from the local market. The equity market also saw Dh2.04bn (€187m) worth of capital increases during the year, up strongly from Dh425.1bn (€40bn) the previous year.

Yet, looking at longer term trends, the number of IPOs has fallen sharply since the global financial crisis of 2008-9. The 2009-15 period saw an average of 1.4 per year (including none in 2009), following 10 listings in both 2006 and 2007 and a further five in 2008.

Performance

Despite the weak outlook for GDP growth this year, stemming from a poor agricultural harvest, the CSE’s Moroccan All Share Index (MASI) had a solid first half of 2016, likely supported at least in part by a central bank decision in March to cut its benchmark interest rate by 25 basis points to 2.25%.

The MASI had risen by 10.72% since the beginning of the year to 9620.4 points as of early July, though this was down from a year-to-date peak of 10,228 in early May. The index had however fallen by 7.2% over the course of 2015, dragged down by negative performances in all but five sectors, including particularly bad performances in the chemical, leisure and tourism, forestry and paper, and real estate sectors. The best-performing share was that of beverages producer Oulmes, up 53.8% as of mid-2016, while the worst was real estate developer Alliances, down 85.3%. The market fall in 2015 followed a 5.6% rise in the value of the index in 2014, but this was preceded by several years of decline due to factors such as a lack of both stock market and broader economic liquidity, as well as a slowdown in investment in the MENA region due to fallout from the so-called Arab Spring and stagnant growth in the eurozone. As a result, the index remains well down from its historic peak of nearly 15,000 in March 2008.

Market Prospects

The outlook for performance in 2016 appears mixed. “The market currently faces both positive and negative pressures and investors appear hesitant as a result,” Karim Gharbi, head of research at Moroccan investment bank Casablanca Finance Group, told OBG. “The economy is growing slowly, and corporate profit growth has been weak over the past two years; however low interest rates are helping to support market sentiment,” he added, noting that while it was unclear whether the index would finish up or down for the year, that it was however unlikely to move more than 5% in either direction.

Gharbi said that as of April 2016 market valuations appeared expensive overall and there were few firms that appeared highly attractive, but there were notable exceptions to this, such as local brewer Brasseries du Maroc. “The share has performed very badly in recent years as a result of factors such as major retailers halting alcohol sales, but all of the major problems facing the company have now been absorbed and growth should return this year,” he told OBG. Gharbi also cited a number of real estate companies undervalued following a poor performance in 2015. Amine Amor, general manager of the asset management firm BMCE Capital Gestion, told OBG that another challenge facing markets is that growth levels in traditional sectors dominating the bourse such as banking and telecoms have fallen off in recent years.

One potentially major development ahead for the market is the planned liberalisation of the country’s foreign exchange rate regime (see Economy chapter). “The restrictions on the dirham mean that local investors currently do not have many investment options, and with very low interest rates many are seeking better returns in equity investments; however, with the removal of these restrictions we could see an outflow of money from the market,” Gharbi told OBG.

Nonetheless, he added that major reforms were unlikely to take place for at least several years. Plans to tighten local insurance regulations by obliging insurance firms to take all potential risks into account, including risks to equity investments, when calculating their capital adequacy requirements (see Insurance chapter) could also lead some firms to reduce their shareholdings in the years ahead, which would also put significant negative pressure on the market.

Trading & Liquidity

The value of trading on the CSE’s central market stood at Dh31.4bn (€2.8bn) in 2015, up 2% year-on-year. Trading on the bloc market, where over-the-counter transactions take place, stood at Dh13.5bn (€1.2bn), down from Dh13.8bn (€1.3bn) a year prior. Yet trading levels remain down heavily on pre-financial crisis levels, with the value of transactions on the central market at Dh213.8bn (€19.6bn) in 2007. Just six shares accounted for more than half of trading in 2015, with Attijariwafa Bank making up nearly a quarter of the total (24.1%), followed by MT on 11.5% and BCP on 9.2%.

Trading is also heavily dominated by institutions, with local corporations (personnes morales) and mutual funds (sociétés d’investissement à capital variable, SICAV) in 2014 accounting for 59.4% and 23.3% of purchases, respectively. Moroccan individuals were responsible for 4.9% of the total, while retail investments through banks accounted for just 0.6% of purchases. In addition, foreign investors accounted for 11.7% of purchases on the exchange in 2015, down from 14.1% of the total in 2014.

“The stock market is not very dynamic at the moment for a variety of reasons, including the fact that it is dominated by institutional investors holding on to shares and waiting for the market to improve,” said Françoise De Donder, managing director of the Moroccan Association of Capital Investors ( Association Marocaine des Investisseurs en Capital, AMIC).

The drop-off in trading levels has given rise to significantly reduced levels of liquidity in the market. As a result of the liquidity squeeze, in June 2013 the Morgan Stanley Capital International index reclassified Morocco as a frontier rather than an emerging market. This was later followed by two other index makers, which exacerbated the situation by leading emerging-market-oriented funds to withdraw their investments in the local bourse. However, industry figures are hopeful that various planned reforms will help to restore liquidity, particularly with the Moroccan market holding a greater weight in frontier indices than in the previous emerging market indices.

Mutual Funds

As of mid-June 2016 Moroccan investors had a choice of 419 mutual funds (Organismes de Placement Collectifs en Valeurs Mobilières, OPCVMs), which had combined total holdings of Dh359.2bn (€32.9bn), up from Dh330.1bn (€30.3bn) at the start of the year and Dh300.5bn (€27.6bn) a year earlier. The latter figure was equivalent to 33.3% of GDP in 2015.

The sector is dominated by medium- and long-term bond-oriented funds, of which there were 147 and which accounted for 56.4% of the total value of funds. Short-term bond funds made up 13.6% of the total, with money-market funds at 19.3%, mixed funds at 4.5% and equity funds at 5.9%.

“The mutual fund industry has seen strong growth over the last twenty years and even continued to expand during the financial crisis,” Amor told OBG, citing factors such as a drive among institutional investors to increasingly outsource some aspects of their financial management, as well as an increased emphasis by local firms on optimising their cash flow. “High levels of innovation are also helping to attract new investment,” Amor said, citing a growing number of themed products such as sector-specific funds, though he added that reduced levels of liquidity in the stock market could sometimes make it difficult to deploy investment strategies.

There were 18 fund managers active in the market in 2014, according to the latest available figures from new market regulator the Moroccan Capital Markets Authority (Autorité Marocaine du Marché des Capitaux, AMMC), of which nine were units of banks and insurance companies. The largest of these by market share was Wafa Gestion, a unit of the Attijariwafa finance group, on 28.5%, followed by CDG Capital Gestion (a unit of investment bank CDG) on 16.8%, BMCE Capital Gestion on 14%, and Upline Capital Management on 10.3%; all other fund operators held market shares of less than 7%.

Financial institutions represented the largest class of investors in local mutual funds at the end of 2014 according to the latest available AMMC data, accounting for 71.5% of investments. The bulk of this, 43.2% of total investments was by insurance firms and pension funds, followed by non-financial companies at 18.8% and Moroccan individuals at 8.8%. “The main challenge facing the industry is commercial distribution. Part of the problem is that banking networks sometimes see mutual fund products as competing with classic banking products, and therefore do not market them very aggressively,” Amor told OBG. “There is also a need for better financial education of the public, which is gradually taking place,” he said, adding that progress on both issues was being made.

Brokerages

There are 17 stock brokerages operating in the kingdom, of which 60% are subsidiaries of banks and three of which together have the lion’s share of the market. Total turnover stood at Dh168m (€15.4m) in 2014 according to latest available figures from the AMMC, for which intermediation activities accounted for 80.2%. Helping firms to raise financing through public offerings accounted for just 4% of turnover, underscoring the low current levels of market activity. Until recently brokerages collectively owned the CSE, yet the exchange was effectively demutualised in June of 2016 with banks, insurance firms and several other institutions allowed to enter.

Bonds

There were 46 corporate bonds listed on the CSE as of July 2016, with a combined value of Dh9.04bn (€828.9m). Banks are the major issuers of listed corporate debt in Morocco, accounting for 26 of the 46 bonds, with a total value of Dh5.9bn (€541m). The largest listed instrument was a 10-year Dh800m (€73.4m) bond issued in 2007 by Attijariwafa Bank, with a coupon of 5.1%, while the most recent were two separate bonds issued by Attijariwafa and BCE in June 2016, both with 10-year maturity periods and coupons of 3.74%. The former issue is worth Dh100m (€9.2m) and the latter Dh78.9m (€7.2m).

In 2015 eight new bonds listed on the market with a combined value of Dh809.7m (€74.2m), up from four issues worth Dh183.6m (€16.8m) in 2014. Yet trading levels fell over the same period, to Dh2.69bn (€246.6m) on the central bond market, down from Dh3.36bn (€308.1m) the previous year and from Dh6.3bn (€577.6m) in 2010. For the bloc market, the figures stood at Dh1.71bn (€156.8m), Dh1.94bn (€177.9m) and Dh3bn (€275.1m) respectively. Trading in the market is dominated by mutual funds, which accounted for 59.7% of purchases and 40% of sales on the central market in the last quarter of 2015, and local corporations, which accounted for 41% of purchases and 60.1% of sales, according to the AMMC.

New Regulator

Morocco’s capital markets are currently undergoing a period of wide-ranging reforms, including the recent establishment of a new regulatory body, the AMMC, which replaced former regulator the Conseil Déontologique des Valeurs Mobilières (CDVM). The new authority was established by legislation that was approved in 2013; however, it did not effectively come into being until February 2016, when its president was appointed. In April 2016, Hicham Elalamy, director of the AMMC, told OBG that work on regulations underpinning the new body was continuing but was well advanced.

The AMMC will be different from its predecessor in several key respects, perhaps most notably in that it now possesses greater independence from the government, as the administrative council of the CDVM was presided over directly by the minister of economy and finance, while the new president is a non-governmental figure. The new regulatory regime also includes the establishment of a new sanctioning body, which is charged with classifying and investigating potential administrative violations and criminal offences. The body, which is presided by a magistrate, recommends disciplinary or financial sanctions to the president of the AMMC, as well as providing its opinion on suspected criminal offences.

“The advantage is that the new council will be able to devote all of its time and attention to the issue,” Elalamy told OBG. The regulations establishing the new body also mandate it with educating the public on capital markets and accrediting some types of sector specialisation, such as equity analysts. The IMF has said that these reforms and planned changes to the stock market law should improve the nation’s alignment to international standards.

Legislative Changes

In addition to the creation of the AMMC, most laws covering the kingdom’s capital markets are currently in the process of being modified, and several entirely new pieces of legislation are also in the pipeline. Prominent among these legislative changes are reforms to the main stock market law that will give more flexibility to the regulatory authorities by moving technical rules on the creation and functioning of markets and their admission criteria from the law itself to regulations covering the CSE, which can be more easily modified. “The new approach will see general principles laid out in the law, while the details will be left to regulations, which will allow for greater innovation,” Elalamy told OBG.

The changes will allow for the planned creation of an alternative market focused primarily on small and medium enterprises, based on the model of the London Stock Exchange (LSE) Alternative Investment Market, as well as for share listings of companies from abroad, which can be denominated in dirhams or foreign currency. A compartment dedicated to tradable investment funds of various types, including exchange-traded funds (ETFs), and real estate investment trusts, will also be created. The bill amending the law was approved by the lower house of parliament in June 2016. A number of pieces of legislation establishing other products are in the pipeline.

Regional Aims

The CSE itself is also implementing a new development strategy for the remainder of the decade, known as Horizon 2020, which, in addition to updating its technology and launching new products such as ETFs, aims to transform the exchange into a regional financial hub – an ambition that will be supported by the establishment of Casablanca Finance City (CFC). “The CSE is changing from a local to an international market and will be completely transformed to a regional trading giant in several years time,” Mohammed Rachid, head of financial sector and business climate affairs at CFC told OBG, saying that the exchange had a great deal of potential as a result of the reforms under way.

Another reform to the kingdom’s capital markets that should help with this is a change in the ownership structure of the CSE, which was finalised in June 2016. Previously rules required the exchange to be owned in equal part by the country’s stock brokerages; however, under the new rules banks, insurance companies, CFC and several other players are now all permitted to own a stake in the institution, subject to government approval of any changes in ownership. “Banks and insurance firms are the main financial actors in the kingdom; furthermore many of them are active throughout the region, which will help the bourse with its ambitions to become a regional player,” Elalamy told OBG.

Future Impact

Industry figures are hopeful that such reforms will help bring about a return of liquidity and listings activity to the market. “To improve the liquidity situation, there is a need for both more IPOs as well as more investors,” Elalamy told OBG. “The LSE’s ELITE programme will help with this, as will listings of foreign companies and a more diverse product offering that will better allow for activities such as arbitrage,” he told OBG, in reference to efforts to launch new products on the market.

The Marsa Maroc IPO also marks the first time the government has conducted a privatisation through the country’s stock exchange, potentially opening the door for more such stake sales.

Outlook

It appears likely to be some time before the market returns to the levels of capitalisation and trading activity that were prevalent prior to the global financial crisis. Nevertheless, the coming months and years will see a wide range of reforms applied across the kingdom’s capital markets, including the launch of new exchanges and a variety of products, all of which should help to boost the CSE’s substantial potential.