Investment in North African markets by international funds has evaporated as shocks in and outside the region have prevented hoped-for economic progress since “Arab Spring” uprisings swept many of the countries nearly three years ago.
Morocco, which has avoided the worst of its neighbors’ turmoil, became the latest casualty on Wednesday when it was relegated in the leading MSCI indices from the league of established emerging markets to the “frontier” division of economies with less developed capital markets.
Along with its North African peers Egypt and Tunisia, Morocco suffers from a gaping trade deficit and relies largely on outside aid from international financial institutions or richer Gulf states, while domestic politics remain unstable.
Portfolio managers are largely steering clear of all three, apart possibly from a small number of strong companies. Instead, regional and international investors are choosing markets such as Dubai, which has already regained a safe haven status only a few years after its property bubble burst.
“The whole (North African) region has struggled in the last year or so,” said Andrew Brudenell, frontier fund manager at HSBC Asset Management. “Foreign investors are mostly not there, apart from a few names in Egypt and 1-2 names in Morocco.”
International investors have directed more than $1 billion of net equity flows to Egypt since 2008, according to fund tracker EPFR. But only a third of this – around $350 million – has arrived since Egyptians overthrew autocrat Hosni Mubarak at the start of 2011.
Net investment in Moroccan and Tunisian equities, the bulk of which is normally in companies listed on local stock markets, has stayed close to zero. This falls short of a number of sub-Saharan African countries such as Nigeria, which has drawn $100 million in net investment over the past three years, according to EPFR.
However, investors remain enthusiastic about individual stocks or interest rate markets. One favorite is Commercial International Bank, Egypt’s most profitable and strongest private bank which lends into some of the most lucrative sectors of the economy such as oil services.
Moroccan picks include Maroc Telecom and property developer Addoha.
A FAR CRY FROM 2010
But this is a far cry from the end of 2010 on the eve of the uprisings, when many international investors had Egypt near the top of their buy lists and were awaiting the first European listing of a state-owned Tunisian company, with more expected to follow. At that time Morocco had just launched a well-received euro bond following a three-year borrowing hiatus.
When Tunisians overthrew president Zine al-Abidine Ben Ali in January 2011, quickly followed by Mubarak in Egypt, investors thought new governments would follow more open economic policies that would benefit them. Instead the revolts started a long period of political conflict and – in the case of Egypt – bloodshed after the army removed Mubarak’s Islamist successor, president Mohamed Mursi, last July after only a year in office.
Morocco had no revolution but has had to raise state spending in an attempt to contain social discontent.
Foreign direct investment into North Africa has fallen, according to the United Nations development agency UNCTAD. It records FDI flows of $11.5 billion into the region last year, up from $8.5 billion in 2011 but well below 2010 levels of $15.8 billion. Western Africa, in contrast, has attracted record FDI levels in the past two years.
The European Bank for Reconstruction and Development, which now invests in Egypt, Morocco and Tunisia as well as Jordan, also sees weak portfolio and FDI flows into the region.
Tunisia – where Islamists and the secular opposition are arguing over forming a caretaker government to lead the country to elections next year – and Egypt are particularly suffering, said Hanan Morsy, the EBRD’s senior economist for the region.
This is due to the prolonged instability alongside weak economic growth in the developed world, such as the euro zone which is normally a major market for their exports.
“The Arab Spring put pressure on public spending and wages at a time when there was a weak external environment and (domestic) political turmoil – it’s a combination of shocks.”
While many frontier markets have rallied this year, Tunisia has fallen 8 percent in dollar terms. Morocco, which until Wednesday was classified as a small emerging market, and Egypt are also flat in dollar terms. The currencies of all three countries which have big trade and payments deficits are at risk of depreciation.
Cairo-based private equity firm Citadel Capital has kept most of its North African holdings to Egypt, apart from a stake in an Algerian cement company. “When you look at North Africa, the story has been the Arab Spring and upheavals,” said Hisham El-Khazindar, managing director of Citadel.
Citadel was also avoiding Libya, Khazindar said, following the overthrow of Muammar Gaddafi two years ago, due to its political and security problems.
Stock-picking investors often point to firms in emerging and frontier markets which have survived coups or wars with their businesses intact. But they say many in Morocco or Tunisia are not cheap enough, as measured by their stock prices as a multiple of their earnings per share, to take the risk.
“There are companies in Morocco that are trading at several multiples of earnings – 17, 20, 30 times. You can find much cheaper alternatives elsewhere,” said Julie Dickson, equities portfolio manager at emerging market fund Ashmore, who preferred countries such as Ghana in an African strategy.
CHINKS OF LIGHT
But there are some chinks of light.
Egypt’s pound has slumped this year, but the local stock market has risen, boosted by past and expected aid from Gulf states and by a promised referendum on a new constitution. International investors have also favoured Egyptian T-bills.
Tunisia launched a dollar bond last year with the help of a U.S. guarantee and is likely to open up to Islamic investment funds, while IMF-supported Morocco has also managed to launch international debt in the past year.
While Egypt remains an emerging market, Morocco’s stock market has joined Tunisia in the MSCI frontier market index, which is followed by a smaller number of investors.
The index switch could still attract fresh risk-taking buyers, particularly as stock valuations there have recently dipped below those of broader emerging markets, making them a little less expensive. The Moroccan unit of Abu Dhabi company TAQA plans to float on the stock exchange in December and analysts believe this could revive the market.
“(Morocco) was a very small fish in a big pond; it will be a slightly bigger fish in a smaller pond,” said Maria Gratsova, EMEA emerging equities strategist at Citi. “It will be in front of the right audience.”