Argentina and Kuwait, the two largest country weightings in the MSCI Frontier Markets index, are set to be reclassified to the MSCI Emerging Markets benchmark over the course of the next two years. Following this, Morocco’s weight in the frontier markets index would increase to in excess of 11 per cent, making the North African country the second largest in the frontier universe.
Morocco is a largely untapped market. Not many companies regularly publish results in English or have functioning investor relations departments – while few take the time to visit London to try and attract investors.
With this in mind, we recently visited Morocco to get a sense of how things felt on the ground. Our most interesting meetings were with select export-oriented and consumer companies, which are well-positioned for market share gains.
Not your average Arab country
Morocco is different from the average Arab country. Its geographical location lends itself to strong links with Europe and its managed currency peg is to the euro, as opposed to the common US dollar peg implemented by neighbours. It has also been a monarchy for more than 13 centuries.
While the Arab Spring was hard on its economy, it managed better than others with the help of sensible reforms and a devolvement of power from the monarchy. This provided a more stable political environment. While still home to twin deficits, balances have trended down from 2012 peaks, with help from the government’s attempts to substitute infrastructure-driven with more export-led growth.
Specifically, Morocco has been successful in attracting European car and aerospace manufacturers. These efforts have come alongside the reduction of subsidies and other inefficiencies in the economy, but the side-effect is a weak consumer environment.
Focus on attracting investment
While the Moroccan economy has steadied, GDP growth has historically been volatile, as agriculture has been an important driver. Foreign direct investment (FDI) has been stuck at the $3bn mark for a decade, accounting for a small portion of inflows. The government is focused on continuing to boost FDI into export-oriented industries – such as its automotive, aeronautics and tourism sectors. If successful, this could help create jobs for the country’s highly skilled and cheap labour force and take advantage of close ties to Europe.
We met with Attijariwafa Bank on our visit, alongside an economist from Morocco’s central bank. We used to own the leading Moroccan bank in our Frontier portfolio but sold it in 2017 after a period of strong performance. However, we took advantage of recent relative share price weakness to build a new position in Attijariwafa.
Growth rates across the sector remain low, in large part because there has been little credit demand over the past six years. But positively, non-performing loan ratios show an improving trend across the system, which should eventually feed through to margin improvement.
Improving consumer dynamic
Similarly, we also recently topped up our exposure to food retailer Label Vie. It operates in excess of 70 stores – the bulk of which are Carrefour supermarkets, after Label Vie entered a strategic partnership with the French multinational in 2009.
Label Vie ran into issues between 2010-2016 after making a series of metro ‘cash and carry’ acquisitions. It also launched a hard discount chain, but it struggled to integrate the three formats and business models. However, 2017 was a turnaround year and management has started to open new stores again, guiding for 15-20 new supermarket openings per annum.
With organised retail having a penetration level of just 15 per cent in Morocco, we think Label Vie may benefit as the sector matures and modernises. Good execution on an ambitious new store opening program is another potential structural tailwind for the stock.
While growth rates are relatively stagnant in Morocco, improved stock specific opportunities led us to reduce our underweight in Morocco from 6 per cent to 4.5 per cent since the end of September 2018.
Oliver Bell is portfolio manager of the T. Rowe Price Funds Frontier Markets Equity Fund. The views expressed above are his own and should not be taken as investment advice.