MIDEAST WEEKAHEAD-Declining Morocco stocks face frontier risk

LONDON/RABAT Wed May 29, 2013 10:00am EDT

LONDON/RABAT May 29 (Reuters) - Morocco's possible demotion to frontier market status next month may deter international investors and put the country's stock market, already suffering from tumbling share prices and trading volumes, further at risk.

Index compiler MSCI, which has $7 trillion in global assets benchmarked against its indices, put Morocco on review for downgrade to its frontier index last year, and makes its decision on June 11.

Relegation from the emerging market index would reduce foreign investor interest in Morocco, which is suffering from the financial crisis in the euro zone, its biggest trading partner.

It would also be a blow to the country's pride as it invests billions of dollars to maintain its reputation for relative stability in the politically uncertain Middle East and North Africa region.

"Morocco's economy is suffering badly due to its close ties with Europe, the market has been penalized with huge pressure on earnings," said Sebastien Henin, portfolio investor at The National Investor in Dubai.

Some Casablanca-listed banking and real estate stocks were hitting record lows as investors sold shares ahead of the MSCI announcement, he said.

"If the country is taken out of the emerging market index, expect the trackers of the index to leave. In an illiquid market such as Morocco, you could have heavy selling."

Liquidity, one of the key factors for inclusion in the MSCI emerging market index, against which $1.4 trillion is benchmarked, is dwindling.

Morocco's overall stock market transactions volume, of which foreign investors make up 28 percent, was 13.421 billion dirhams ($1.56 billion) in the first quarter, plunging 59 percent from the fourth quarter of 2012. Compared with the first quarter of last year, volume was down 8 percent, according to data from bourse watchdog CDVM.

"It is almost impossible for an investor to make a big trade without affecting the share price," a local trader said.

Morocco's free-float market cap, another main factor influencing MSCI's rankings, has lost almost a third since 2009, falling to around 90 billion dirhams.

The Casablanca bourse's benchmark MASI index has dropped 14 percent since the MSCI said last June that Morocco could be downgraded, and is trading at around 8,727 points, close to its lowest levels in more than six years.

It has fallen 6 percent, including two sessions of downward gaps - an opening level well below the previous day's low - since MSCI set the date of its review a few weeks ago.

Moroccan officials say they have been lobbying hard to retain their place as an emerging market, including making roadshow presentations.

"We have a short-term action plan promoting scenarios to help Morocco have more liquidity," Anass Alami, chief executive of the government's financial arm CDG, told Reuters on a visit to London earlier this year.

"Long term there are (plans for) laws on short-selling which will help liquidity."

Investors have also been canvassed for their opinions on MSCI's review. MSCI is also considering an upgrade from frontier status for Gulf economies Qatar and the United Arab Emirates.

Moroccan stocks make up less than 1 percent of the MSCI emerging market index. One of the three constituents, Maroc Telecom had its weight reduced by 50 percent last year due to low liquidity.

A drop to frontier status would mean smaller amounts of money would track Morocco, and investment banks would probably assign fewer research analysts to the country.

But Casablanca boasts stronger local liquidity than other frontier markets such as those in sub-Saharan Africa, according to Luca del Conte, in capital markets sales at broker Exotix.

Valuations, while historically low by Moroccan standards, are also above the average for frontier markets, according to Datastream. (see link.reuters.com/sap48t for graphic)

Del Conte thought Morocco may hang onto emerging market status for now, particularly given Taiwan and South Korea, for example, have been on review for upgrade to developed market status for years.

"Just like we have the annual Cannes film festival, we have the annual MSCI review," he said.

FRONTIER BOOM?

If MSCI does downgrade Morocco, some market watchers see a silver lining.

Morocco would increase its weighting in its MSCI index from less than 1 percent to as much as 10 percent.

And as valuations are historically low, the country could benefit more from the current dash to high-yielding frontier market assets, as developed market central banks around the world stick with minimal interest rates.

"It would be sad to lose the MSCI's rating as an emerging market," CDVM CEO Karim Hajji said, but added:

"It is not necessarily bad news - we can benefit from being frontier market assets."

When Israel moved the other way, with an upgrade to developed market status in 2010, foreign investor flows initially shrank to practically zero, as Israel's weighting in the index was so small.

If either UAE or Qatar made the leap to emerging market status, that would leave a hole in the frontier index that Morocco could go some way to fill.

UAE currently makes up 12 percent of the frontier index and Qatar 15 percent, according to MSCI.

But Moroccan stocks may have to fall even further before they attract investors back, with some expecting the well-developed local fund industry will keep valuations high relative to other markets in the region.

"Since MSCI's plans last year to downgrade Morocco to the frontier market index, there has been an outflow of funds from international investors," said Faid Al Said, head of investments at ING Investment Management in Dubai.

"As a country, it's an important market, but we're staying away, in wait for interesting valuations and entry levels." ($1 = 8.5827 Moroccan dirhams) (Additional reporting by Nadia Saleem in Dubai and Natsuko Waki in London; Editing by Susan Fenton)

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