Encouraging activity: After a tough 2012, the authorities are looking to reforms to energise the market

With the crisis in the eurozone on one side of the Mediterranean and ongoing unrest in the Middle East and North Africa on the other, 2012 was another challenging year for the Casablanca Stock Exchange (CSE). Investors were faced with continued volatility in the local markets, as the Morocco All Shares Index (MASI), a value-weighted index made up of all 77 listed companies, fell for a second straight year, dropping 15.3% over the course of 2012 and making the CSE one of the worst-performing bourses for the year. Elsewhere in the region, Egypt gained 50.8%, while Jordan dropped by 1.9% and Tunisia lost 3%. But rather than selling off their shares, many investors held firm, hoping for prices to recover.

The index continued to slide into early 2013, however, trading at around 8850 in late February, down 5.42% year-to-date and 22.40% year-on-year. Market capitalisation on the exchange was Dh425.28bn (€37.81bn) in late February 2013, and the top five listed companies by capitalisation were telecoms provider Itissalat Al Maghrib (Dh93.76bn, €8.34bn), Attijariwafa Bank (Dh60.40bn, €5.37bn), banking firm BCP (Dh33.16bn, €2.95bn), BMCE Bank (Dh25.84bn, €2.30bn) and cement producer Lafarge Ciments (Dh20.61bn, €1.83bn).

CASABLANCA FINANCE CITY: As part of its Casablanca Finance City (CFC) project, Morocco nurses the ambition of becoming a regional financial centre (see analysis), with the CSE aiming to secure listings from across Africa. However, Morocco’s stock exchange lost more value and traded less volume in 2012 than it did in 2011, prompting calls for an acceleration of legislative reforms that would provide regulators with more tools to help restore its attractiveness as a source of financing. On a more positive note though, a deal was inked in October 2012 to increase cooperation between the CFC and TheCityUK, an organisation that promotes the UK’s financial and professional services abroad. The main objectives of the partnership include facilitating the roll-out of a Moroccan derivatives market, improving the competitiveness of domestic insurance companies, and expanding training and educational programmes.

BACKGROUND: Established in 1929, the CSE was one of the first bourses in Africa. As a member of the International Organisation of Securities Commissions, which regulates the world’s securities and futures markets, the CSE represents the Middle East and North Africa region. The exchange has progressed through several phases of development, and in 1997 it adopted an electronic trading system. The trading system was upgraded further in 2001 to allow delocalised trading from the offices of local brokers. The national central securities depository, known as Maroclear, was established in 1998 for settlement, securities transfer and payment, and operational risk minimisation. The system became fully G30 compliant by 2001, with settlement versus delivery occurring on trade date plus three working days. Trading is reported electronically to market participants and to international data vendors including Bloomberg and Reuters, providing the market with the opportunity to attract overseas investors.

THE INVESTORS: The market is currently dominated by institutional investors, such as pension funds and insurance companies, which act on long-term trends. Other players include UCITS investment funds, high-net-worth individuals (largely trading through their banks) and foreign investors. Moroccan investors, however, have become accustomed to the high, quick returns seen when the bourse was more liquid, with trading volumes previously about twice as high as they are now. By holding on to their stock, investors are lengthening the correction process that began in 2011. A correction could ultimately help the market catch its breath by getting investors trading again, but that requires investors to reposition themselves by letting go of stocks, which has not happened. “The Moroccan market sometimes corrects over several years,” said Hicham Elalamy, deputy director-general of the Moroccan market regulator, Council for the Code of Ethics in Securities (Conseil Déontologique des Valeurs Mobilières, CDVM). Indeed, the MASI fell in 2011 as well, by 12.9%.

Institutional investors tend to base their investments on long-term trends and can afford to ride out volatility provided that prices do, in fact, eventually recover, said Amine Amor, president of the Moroccan Association of Asset Management Firms and Investment Funds.

Investors on the CSE generally trade when prices are rising, with this helping to explain the drop in volume now that values are falling. Short selling, which would enable investors to profit from the downward trend, is not allowed on the CSE at present, although a new law is set to change that. At the time of writing, it had been passed by parliament and was awaiting application texts to bring it into force.

OPERATING EFFICIENCY: In contrast with institutional investors, retail trading is highly seasonal and tends to peak after initial public offerings (IPOs). Trading volume is generally correlated with transaction costs. In addition to the exchange fee of 0.1%, traders typically add a 0.6% commission – the maximum allowed by the bourse – as well as a 0.3% custody charge. Value-added tax on services is 10%, while capital gains is set at 15% after being reinstated in 2006. As a general rule, the higher the transaction costs, the lower the operating efficiency. “The capital markets now move at two speeds: that of the traders and that of the clients. This is posing a problem because if clients do not know the options available to them, traders cannot move forward with their financial operations. This is why it takes a while before the futures and options markets will be fully operating,” said Mouhssine Cherkaoui, the deputy director-general of Upline Group.

INCREASING AWARENESS: Efforts are under way to increase awareness of the CSE and improve the financial literacy of Moroccans. There is also a drive to attract more companies to the exchange. In 2012, the bourse met with over 170 companies and groups, with some showing an interest in holding IPOs, Badr Benyoussef, the exchange’s business development officer, told OBG. At present, the listed companies are not representative of the kingdom’s economy, as the shares of just 79 firms are available. Over 90% of Moroccan corporations are small and medium-sized enterprises (SMEs), according to the central bank, Bank Al Maghrib, a segment that is typically under-represented on the market.

Financial authorities are encouraging more businesses to list by offering a range of incentives, especially to SMEs. The CSE subsidises up to Dh500,000 (€44,450) of expenses related to IPOs, including legal and financial advice. The government offers listing firms a 50% rebate on the 30% corporate tax rate during the three accounting periods immediately following an IPO when new shares are sold, although the 50% break was due to expire at the end of 2012.

VOLUME: The market in Morocco is shallow and illiquid compared to other emerging and frontier markets, with many large firms controlled by privately owned holding groups and few properly structured to qualify for entry onto the CSE. According to BMCE Capital, in 2012 total volume fell 17.4%. The central market slipped 15.6%, with the average volume dropping 15.2% and the block market falling by 22.5%. The drop in volume, suggesting a lack of activity, is more worrying than the fall of indices, according to Elalamy, “When the correction is significant, we get the volumes, investors position themselves and activity resumes.” The new law on short selling is expected to increase volumes, which could bring about the emergence of more attractive stock prices and potentially draw new investors to the CSE. Even so, the market awaits an application text for the new law to be effective and, in the meantime, investors continue to operate in an illiquid market.

POTENTIAL DEMOTION: The MSCI announced in a June 2012 press release that it was considering demoting the CSE from the MSCI Emerging Markets Index to the MSCI Frontier Markets Index. “The MSCI Morocco Index is more in line with the size and liquidity requirements of frontier markets following a significant decrease in liquidity since 2008, which resulted in a simultaneous decrease in the number of constituents in the MSCI Morocco Index.” The MSCI Morocco Index now has only three constituents, including Maroc Telecom, which saw its weight reduced by 50% due to low liquidity, the release noted. If the kingdom were to be demoted, there could be a silver lining, however. In the new category, it could stand out by offering better infrastructure and regulation and more sophistication than many other frontier markets. It is also one of the few countries in the region to have received a BBB- investment-grade rating from Standard & Poor’s.

SECTOR PERFORMANCE: In 2012, only two sectors, finance and beverages, had positive performances on the bourse, as opposed to five sectors the previous year. Financial services rose by 6.57% in 2012. The index was drawn upward by the year’s best performing stocks: Taslif, which increased by 44.84%, and Diac Salaf, which rose 33%. Eqdom, another financial services company, went up by 19.76%. The beverages sub-index rose by 5.57%, carried along by the performances of Oulmes (up 13.2%) and Brasseries du Maroc (up 6.3%).

The worst-performing sector on the bourse in 2012 was the leisure and hotels sub-index, which plummeted 42.1%, weighed down by the weak showing of Risma, which fell 42.1%. The sector’s performance can partly be explained by the reduction of tourism receipts; while visitor numbers appeared stable year-to-year, travellers spent less on average than they did the previous year. The IT sector fell by 39%, weighed down by Disway, which dropped 48.35%, and by S2M, which fell 47.5%. The oil and gas sector also saw losses in 2012, slumping 37.3%, pulled down by the performance of Société Anonyme Marocaine de l’Industrie du Raffinage (down 54%).

Aggregate earnings in 2012 for companies listed on the CSE were poor, with few recording any growth and most making losses, according to Youssef Benkirane, the president of the Professional Association of Stockbroking Firms. Indeed, according to Amor, stocks fell to valuations not seen since 2003-04.

EQUITY & DEBT: After a boost in the markets in 2010, equity shares began to follow a downward trend from May 2011, which has since continued. Investors have lost confidence in the volatile markets, where poor rates of return have led them to turn away from equities and focus on safer investment classes, such as short-term bonds.

The UCITS investment funds that have posted the best performance were those focusing on short-term bonds, with a jump of 31%, while equity funds have lagged behind. All other investment classes fell. “Individuals have been used to gaining quickly, and a lot,” said Amor. “Now they are learning to judge the long-term performance of the market, but it will take a bit more time for them to learn that.” New IPOs and better valuations would also help to make the equity market attractive again. “The value levels are becoming more and more interesting. In recent years, the Moroccan stock market had high values compared to its own history or to other markets of the same size,” Amor said.

Meanwhile, the debt market continues to see activity, especially from banks and real estate companies. Investment bank Caisse de Dépôt et de Gestion (CDG) Capital, a subsidiary of CDG, created a Moroccan bond index and organised a conference on securitisation in October 2012. Regular bonds performed well, as did negotiable debt instruments such as treasury bills and certificates of deposit (CoD) for banks and credit institutions. From January 2012 to December 2012 the Moroccan Bond Index rose 2% from 170.45 to 174.45.

Banks pledged treasury bills as collateral to get advances from Bank Al Maghrib. Due to the lack of liquidity, the central bank also started to accept CoDs and other financial instruments as collateral in 2012. In late 2012, Morocco also raised its first dollar-denominated bond with a value of $1.5bn. The governor of the central bank, Abdellatif Jouahri, told the media that the choice of the dollar had been deliberate given the current vulnerability of the euro.

IPOS: Afric Industries, a manufacturer of abrasives, tape and aluminium joinery, held the only IPO in 2012. The company issued 38% of its capital, or 110,770 shares, at a price of Dh240 (€22) per share. Demand for the company’s stock was more than five times oversubscribed, with 41.9% of shares going to individuals and the other 58.1% going to Moroccan corporations and institutions, according to the CSE.

Two other companies, metalwork and façade manufacturer Jet alu Maroc and electronic payment firm Société Maghrébine de Monétique, had also issued IPOs in late 2011. Earlier that year, in June, engineering and construction firm STROC Industrie issued an IPO, making a total of just four IPOs in two years. “Because the market is slow, companies are holding off issuing IPOs, so we find ourselves in a vicious cycle; we need new IPOs to bring new dynamism to the market,” Elalamy told OBG. The new entrants were hit by the broader negative trend on the bourse, with STROC Industrie falling 53.78% by the end of 2012, while Société Maghrébine de Monétique slumped 38% and Jet alu Maroc dropped 26.6%.

New IPOs are expected following the divesting operations of Morocco’s largest holding company, SNI-ONA, which resulted from the merger between Société Nationale d’Investissement and Omnium Nord Africain in 2010. Since joining forces, the firm has sold its assets in three companies that had all been market leaders. Its stake in Lesieur Cristal was ceded to Sofiprotéol, Centrale Laitière went to Danone and BIMO was acquired by Kraft Foods. The group is also planning to sell control in sugar firm Cosumar and mineral water company Sotherma. According to Karim Chbani, investment manager at SNI, Danone and Lesieur Cristal will eventually issue secondary IPOs for the leftover capital from the sale.

VENTURE CAPITAL: The first venture capital firms were established in 1993 and have since developed organically. Indeed, organisation of the industry has improved under an umbrella body, the Moroccan Association of Capital Investments. A growing share of capital is being invested in the services sector, and two of the four recent IPOs, Jet alu Maroc and Société Maghrébine de Monétique, were the result of exits by venture capitalists. The law was recently changed to open industries to new investment capital; prior to this, only venture capitalists that invested 50% of their capital in SMEs were eligible for tax breaks, but these incentives now extend to investors that invest 50% in any company, as long as that firm is not already listed on the stock exchange.

NEW INSTRUMENTS: The 1993 Law on the Casablanca Stock Exchange has changed little over the years, and efforts are ongoing to further liberalise the management of the CSE and to empower the regulator. “We have a project to revise the law on the CSE, which will allow us to determine categories of companies through regulation instead of going through the parliament to obtain new laws,” Elalamy told OBG. Even so, it remains a question of balance. “We want to make access easier, but we also need transparency because we are dealing with public offerings and we need to protect investors,” he said.

Another potential area of reform is the preliminary approval of the Regulatory and Public Offering Authority by the Council of the Government. This will eventually result in the CDVM being renamed as the Moroccan Authority of Capital Markets, and would provide a terminal market and greater authority for the regulator to change the rules via regulation, rather than pushing for new laws. This change, however, was still pending at the time of publication.

Islamic finance instruments are also expected to have an impact, with a law to allow securitisation set to open the markets to sukuks (Islamic bonds), a move that could attract investments from Africa and the Middle East. Recent studies indicate that the global sukuk market had issuances in 2011 of €65.1bn, a record exceeded in 2012, when sukuk issuances had topped €82.5bn as of October.

OUTLOOK: The MASI has been slumping for two consecutive years, with just four new IPOs issued over this period. Investors and firms considering listing are so far are sitting tight, waiting for conditions to improve, making renewed activity a key objective for the bourse and its regulators. As well, a law allowing short-selling is expected to boost stock activity.