Morocco reclassified as a Frontier Market:Fresh capital injections and continuous supportcan boost the Casablanca Stock Exchange

Morocco reclassified to MSCI Frontier Markets Index on Tuesday 11 June 2013

This reclassification is due to the Casablanca Stock Exchange’s on-going liquidity problems with the result that only three companies listed on the Casablanca Stock Market remain in the MSCI Emerging Markets Index.

It is worth remembering that the MSCI Emerging Markets Index consists of 821 companies listed on 21 different markets. Only Egypt, South Africa and Morocco are included from Africa and the MENA region.

With theindex’s total capitalisation standing at USD 3,917 billion, Morocco, represented solely by Maroc Télécom, Attijariwafa bank and Addoha, the only companies to satisfy eligibility criteria, accounts for only 0.1% of the index. Membership of the MSCI Emerging Markets Index, although prestigious, has not provided any real benefit to the Casablanca Stock Exchange in terms of additional capital flows. This is due to the relative insignificance of the Moroccan market compared to other markets within this index.

By contrast, Morocco will have a much higher weighting and an increased number of representative stocks after reclassificationas a “frontier market”. Given that the MSCI Frontier Markets Index has been adopted as a benchmark for “frontier market” investment funds, Morocco’s inclusion will automatically generate increased interest in Moroccan stocks and additional capital flows in the short term and on an on-going basis. These flows are likely to exceed the trading volume previously generated by “emerging market” investment funds due to Morocco’s relatively insignificant weighting previously.

The new weighting of Moroccan stocks in the MSCI Frontier Markets Index is also expected to raise the Casablanca Stock Exchange’s profile within the global investment community since the increased weighing within the MSCI Emerging Markets Index will provide investors and portfolio managers wishing to gain exposure to Africa and/or the MENA region with a more appropriate benchmark.

In addition, with a market capitalisation of more than USD 11 billion, Maroc Télécom will become the largest holding in this index.

Fresh capital injections almost automatic

Assets invested in index funds for which the MSCI Frontier Markets Index is the performance benchmark are estimated at nearly MAD 3 billion. Morocco’s weighting, estimated at about 6%, is likely to generate an immediate investment of about USD 200 million. Morocco’s weighting in the index is likely to result in additional trading volumeon an on-going basis.

The Casablanca Stock Exchange is should witness a recovery in trading volume to its previously high levels as a result of fresh capital flows, the various recovery measures introduced by the Casablanca stock market and the programme of reforms currently underway.

A number of measures aimed at boosting the stock market have been introduced to enable the Casablanca stock market to fulfil its ambitionof becoming a regional financial hub, participating fully in financing the Moroccan economy and capable of offering financing alternatives to African companies in their quest for capital.

These measures, which are aimed at both the supply-side as well as demand, include:

  • Supply-side - offering a more diversified range of financial instruments to issuers and investors by means of a legal and regulatory framework governing securities lending likely to positively impact market liquidity, through covered bonds, exchange-listed funds, sukuks and improved access for small and medium size enterprises to capital markets by establishing an alternative markets for SMEs;
  • Demand - stepping up efforts at financial education and developing new savings products;
  • Market infrastructure - acquiring a new trading and market surveillance platform, establishing a clearing house and introducing a futures market.

Morocco’s new-found status as a frontier market, which goes beyond a simple reclassification, may generate new opportunities to attract investors, which can only be enhanced by the successful completion of the reform process already underway thanks to the motivation and involvement of the authorities and all stakeholders.

I n d i c e s

Stock market indices are indicators used by investors and portfolio managers to measure the performance of stock markets segmented by category on the basis of specific criteria.

The MSCI World Index is an equity index calculated by Morgan Stanley Capital International. The MSCI World Index measures the performance of the developed economy stock markets.

The MSCI Emerging Markets Index is a free float-adjusted market capitalisation-weighted index which aims to be representative of emerging countries’ equity market performance. In 2012, the benchmark MSCI Emerging Markets Index fell by about 13% in dollar terms.

“Frontier markets” is a term denoting emerging countries with established financial markets which are investablebut which have lower market capitalisation and liquidity than more developed emerging markets.

How indices work and the management of specialist investment funds

A country’s inclusion in an index, whatever the index, has a mechanical impact on the allocation of funds in respect of the country in question. Index funds mirror the composition of the index as closely as possible in order to replicate the latter’s performance. The investment strategy of these funds is therefore entirely based on the composition of the index.

Morocco’s low weighting in the MSCI Emerging Markets Index means that, given the workload, transaction costs and risks incurred, investor interest in the Casablanca stock market from this investor class is extremely limited. Given the above factors, Morocco’s inclusion in the MSCI Emerging Markets Index offers only limited benefit in operational or financial terms.