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Morocco: Bull Run

The Casablanca Bourse has been galloping along since the start of the year, leaving analysts and investors throughout the region mulling over just what exactly is going on, and how sustainable this bullish rally will prove to be.

Indeed, at the close on February 9, the Casablanca Stock Exchange saw both of its main indexes up around 30% over year-end 2005.

The Moroccan All Shares Index (MASI), a free-floating index including all 55 stocks quoted on the exchange, has surged 29.86% this year. Meanwhile, the Moroccan Most Active Shares Index (MADEX), which includes only the 20 most traded stocks, has jumped 31.32%.

Furthermore, these hikes have taken place on substantial trading volumes, with the volume of transactions in January alone amounting to roughly a fifth of the volumes traded all through 2005. As a result, the bourse's market capitalisation has now topped Dh325bn, or almost US$36bn, up from just Dh252bn (US$27bn) at the end of December 2005.

While this unprecedented rally has triggered contrasting reactions in financial circles, many analysts have pointed to a massive inflow of petrodollars from the Gulf as the cause.

Indeed, financial markets have seen impressive growth throughout the Gulf and beyond, with the Cairo and Alexandria Stock Exchange skyrocketing 135% in 2005.

Against this backdrop, pundits explain that Gulf investors, flush with windfalls linked to the current oil bonanza, are eagerly looking for fresh portfolio investment opportunities. They are therefore said to be flooding exchanges seen as still presenting significant growth potential.

Supporting this view, stockbrokers are hinting that they're currently snowed under buying orders from Middle Eastern clients, mostly through London-based intermediaries.

With market capitalisation at only 55.2% of GDP at the end of 2005, but a number of initial public offerings (IPOs) on the way - plus Morocco's liberalisation drive showing no sign of abatement - most analysts concur that the Casablanca exchange has only started to bridge the gap with its most prominent regional counterparts.

Indeed, these are currently showing very high price to earnings ratios (P/Es), ranging from 19 to over 34, while the Casablanca Bourse is just above 17.

However, the current bullish rally seems to be taking even the shrewdest analysts by surprise. Interviewed by Moroccan daily Aujourd'hui le Maroc in early February, with the bourse already having gained over 20%, Moroccan stockbroker Finergy's top analyst, Hicham Ayyouch, said that the increase was likely to reach 30% over 2006 - a result that was actually achieved less than a week after he issued this forecast.

Meanwhile, institutional investors are thought to have also played their part in this rally, with Morocco's financial heavyweight Caisse de Dépôt et de Gestion's said to be holding its own against richer foreign counterparts.

Yet another factor might partly explain the significant money inflow that has spurred the bourse since the new year. In December of 2005, Finance Minister Fathallah Oualalou appeared determined to abolish the fiscal provision providing for an exoneration of the 10% tax on paper profit, which might have prompted investors to cash in their 2005 profits while the exemption was still running.

With the upper chamber, the Chamber of Counsellors, managing to turn the decision around in mid-December - a result the lower chamber had failed to achieve a few days before - it looks as though investors have celebrated the good news in their own way. According to some Counsellors, the exemption might even be maintained until 2008.

Meanwhile, many analysts have expressed the view that the exchange is actually only making up for lost time. Indeed, the Moroccan exchange went through difficult times at the turn of the century, with a persistent bear market luring investors away between September 1998 and October 2002 - a gloomy period in which the MASI lost almost 50%.

Yet the bourse regained 32.3% in 2003, then 14.7% in 2004 and 22.5% in 2005, finally crawling back up to its pre-crisis level later that year.

With only 55 companies listed, and only about half of those actively traded, another cause for concern is the Casablanca Bourse's limited depth. While this has doubtless played a significant part in the intensity of the current bullish run, local observers fear it could become a serious threat if foreign investors move away to some new El Dorado.

As a matter of fact, foreign investors are thought to have been a major driving force in the Moroccan bourse's 1998 crisis, as they moved to cash in the profits they had made during the previous upwards rally. Indeed, the MASI had surged 156% between January 1996 and August 1998, and this bubble suddenly burst when foreign investors tried to partly make up for losses in eastern Asia, leaving the Moroccan bourse in despair.

While the exchange has gained depth recently with the introduction of five new companies since July 2004, a number of analysts are underlining that it still lags behind most of its regional counterparts in this respect. In their view, fresh paper is urgently needed in order to prevent the creation of another bubble, the bursting of which would probably cause significant damage to the Moroccan economy.

© Oxford Business Group 2006