MIDEAST WEEKAHEAD-Declining Morocco stocks face frontier risk

By Carolyn Cohn and Aziz El Yaakoubi

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 http://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)

Source: http://news.yahoo.com/mideast-weekahead-declining-morocco-stocks-face-frontier-risk-140000433.html

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