Morocco; Gateway to Africa? About the improved investment climate of the Maghreb

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LMG presentation at the B2B event organized during Maroc Expo 2013 (Dec 28-29 2013 in Nieuwegein, The Netherlands)

LMG believes that the downgrade of Morocco from MSCI Emerging Markets to MSCI Frontier Markets index is not necessarily bad for the country. It is better to be large in a smaller index than a rounding error in a bigger one.

The country is relatively stable - both economically and politically - and under the guidance of King Mohammed VI the new moderate Islamic government has expanded the network of international good contacts (in which EU; mainly FRA and SPA; and USA were the most important ones) with closer ties to the GCC and Saudi Arabia. This will further reduce the dependance of the country on Europe.

LMG believes that in this setting the potential gateway role of Morocco in Africa - where it is according to us one of the top-5 economies - is a solid one. Within Western Africa Nigeria is often considered still too risky by many investors with Morocco then becoming an option when one wants to enter West Africa (with the knowledge of the French language being a nice bonus), also taking into account that within North Africa Egypt is currently struggling with economic recovery and political restructuring issues.

The potential of Islamic Finance opportunities in the country can - supported by the government, legal system and Middle Eastern partners - add more fuel to this investment perspectives upgrade.

Sectors that we believe in: Tourism, Phosphates, (Renewable) Energy, Textiles/Apparel, Sub-components, Selected IT and Communication Services and some others mentioned in the presentation

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Morocco; Gateway to Africa? About the improved investment climate of the Maghreb

  1. 1. LMG Emerge  Morocco;  Strongly Improved Investment Climate  About the How and Why December 27, 2013 Erik L. van Dijk CEO/CIO
  2. 2. Presentation Outline  1. LMG Emerge – Who We Are and What We Believe In 2. Morocco – The Country, The Economy and The Stock Exchange 3. Morocco – Gateway to Africa? 4. Evaluation
  3. 3. 1. LMG Emerge   Who we are   LMG Emerge Specialist institutional investment consultant in the Continental European Market and Gulf region; currently  staff of 10; additional ‘human resources’ via partnerships Strong ‘Backbone partners’: Emirates NBD (UAE; General Concept, Investment platform & Infrastructure and  GLOCAL EM); Invest AD (UAE; GLOCAL FM – Coop in Morocco via Wafa Gestion); Banque Privee/Edmond de  Rothschild (FRA‐LUX‐CH; BPERE/Custody) Asset Allocation (how much to invest in which Country? Sector? Or Asset Class?) approach incorporates 100  countries • Innovative joint work with Nobel Prize Laureate dr Markowitz (FAJ Mar‐Apr 2003), chosen by dr Markowitz and a group of fellow Nobel Laureates as one of his best articles  • Research at US top university MIT in Boston confirms added‐value of the approach (+ 1‐2% more risk‐ adjusted return) Investment Manager Selection  GLOCAL Investment Concept = ‘Global’ + ‘Local’ Certificate of Shariah‐Compliance for new Islamic Products Advisory Assets under Management more than Euro 40 billion over the period 2005‐current
  4. 4. 1. LMG Emerge Who We Are (2)  LMG Emerge (continued) Fund Solutions in Luxembourg (2013‐current) In collaboration with Novacap AM and our backbone partners (BPERE as custodian) construction of a  Luxembourg‐based SIF‐SICAV structure that enables us to roll‐out the GLOCAL concept through a  series of (CSSF‐regulated) Fund‐of‐Funds for (U)HNW, Family Office and (smaller) institutional clients. • • • NHS LMG Glocal Debt Fund (April 2013) NHS LMG Glocal Opportunity Fund (April 2013) NHS LMG Glocal Turkey‐Central Asia Fund (Forthcoming Q2 2014) • • NHS LMG ESG Shariah Fund (Forthcoming Q1 2014)* NHS LMG Shariah Emerging Yield Fund (Forthcoming Q2 2014)* • • Product investing in Morocco * Ucits IV NHS LMG Glocal Equity Fund (April 2013) NHS LMG Africa Fund (Forthcoming later in 2014 – Q3 or Q4)
  5. 5. 1. LMG Emerge What We Believe In (1) • Belief 1 – Size Matters Morocco was for the big direct and portfolio investors a relatively small country in (part of; NA) a smaller region (MENA) Appetite for the country increases, because a growing interest in Africa is now making it more important Internal developments providing support Reweighting in MSCI Indices (from Emerging back to Frontier Markets) actually providing support (!) PROVIDES ALSO SUPPORT TO SMALLER INVESTORS FOCUSING SOLELY ON THE COUNTRY
  6. 6. 1. LMG Emerge What We Believe In (2) • Belief 2 – Diversification as Free Lunch Markowitz – Van Dijk, FAJ March/April  2003: New Diversification Framework New Frontier Region Africa? Safer to have more eggs in your basket! FUNDAMENTAL instead of MV Weights
  7. 7. 1. LMG Emerge What we Believe In (3) • Belief 3 – Frontier Markets are Hot, ‘’Sexy’’  and still Under‐Represented Better growth chances in faster growing economies; lots of new developments; in an environment of (still!) investor neglect This makes for a great opportunity IF‐AND‐ONLY‐IF i) forces are bundled and ii) mutually‐beneficial co‐ operations with locals are established
  8. 8. 2. Morocco (1) – The Country, The Economy and The Stock Exchange   The Country Constitutional Monarchy; like the Netherlands but king has (far) more power than Willem‐Alexander Disciplined reaction after Arab Spring turbulence set the Middle East on fire • There were demonstrations • Press was already (relatively) free to start with • Tricky topics: Islam, the Monarchy and Western Sahara • Moderate reaction government • New Constitution (approved by referendum) Moderate Islamic party (PJD; 27% of seats) rules after election win in November 2011; PM Benkirane from this  party • Wants to strengthen ties with EU and GCC (with the King himself actively working on ties with US!) • Economic Growth Target: 5.5% per annum • Reduce unemployment rate to below 8% by 2016 Legal System based on French and Islamic Law (mixed): Problem or Scary? Not really; compare the  development of Dubai Pragmatic and realistic approach that almost looks boring and not ambitious enough!
  9. 9. 2. Morocco (2) – The Country, The Economy and The Stock Exchange   The Economy Interesting Analysis by CIA Factbook Positive Developments under the guidance of King Mohammed VI; Improved Finances and Stable Development Morocco has capitalized on its proximity to Europe and relatively low labor costs to build a diverse, open, market‐oriented economy.  In the 1980s Morocco was a heavily indebted country before pursuing austerity measures and pro‐market reforms, overseen  by the IMF. Since taking the throne in 1999, King MOHAMMED VI has presided over a stable economy marked by steady  growth, low inflation, and gradually falling unemployment, although a poor harvest and economic difficulties in Europe  contributed to an economic slowdown in 2012.  New Development Initiatives Industrial development strategies and infrastructure improvements ‐ most visibly illustrated by a new port and free trade zone near  Tangier ‐ are improving Morocco's competitiveness. Morocco also seeks to expand its renewable energy capacity with a goal of  making renewable 40% of electricity output by 2020. (LMG: new Wealth Fund focused on Tourism industry; Casablanca  Finance City initiative) International Co‐operative Agreements; and Sector Policy Key sectors of the economy include agriculture, tourism, phosphates, textiles, apparel, and subcomponents. To boost exports,  Morocco entered into a bilateral Free Trade Agreement with the United States in 2006 and an Advanced Status agreement  with the European Union in 2008. (LMG: And do not underestimate its Gateway to Africa Role – see ch 3; possibilities in  selected services (e.g. call centers for French firms; IT for the Arab/French market and the GCC cooperation) But we are not there yet: Challenges (unemployment, education, investment stimulation, corruption) remain Despite Morocco's economic progress, the country suffers from high unemployment, poverty, and illiteracy, particularly in rural  areas. In 2011 and 2012, high prices on fuel ‐ which is subsidized and almost entirely imported ‐ strained the government's  budget and widened the country's current account deficit. Key economic challenges for Morocco include fighting corruption  and reforming the education system, the judiciary, and the government's costly subsidy program.
  10. 10. 2. Morocco (3) – The Country, The Economy and The Stock Exchange   But something needs to be done to mobilize large available savings (>25%!) and cut current  account deficits and budget imbalances Closer Ties: KSA, GCC Coop US, EU + Stimulate  INVESTMENTS EU Economic Problems Energy Costs Sources: El Cano Institute (Spain); LMG Emerge and IMF
  11. 11. 2. Morocco (4) – The Country, The Economy and The Stock Exchange   The Stock Exchange – LAGGING LIKE CR..ZY PLUS REMOVAL FROM MSCI EM MARKETS! BACK INTO FRONTIER MARKETS SPACE Gross Total Performance; MSCI Indices Nov 2013 (incl last 10 years) MSCI Index Market Type Region #Sec Month 1Yr 3 Yr FM Africa 3.50% 19.32% 7.36% BOTSWANA 2 FM Africa -0.10% 66.62% 25.77% GHANA 2 FM Africa 1.94% 63.70% 23.10% KENYA 6 FM Africa 1.31% 31.07% 9.17% MAURITIUS 2 FM Africa -7.00% -5.42% -7.51% MOROCCO 8 FM Africa 2.32% 38.90% 21.74% NIGERIA 15 FM Africa -1.66% -7.78% -7.95% TUNISIA 3 FM Africa 8.87% 53.87% 27.77% ZIMBABWE 2 FM Asia ex China 2.97% 13.18% -18.48% BANGLADESH 4 FM Asia ex China 1.61% 32.57% 19.12% PAKISTAN 12 FM Asia ex China -4.44% 10.41% -7.60% SRI LANKA 3 FM Asia ex China VIETNAM 11 -0.10% 20.23% -4.80% FM EM Europe/Central Asia -2.08% 7.74% 2.74% BOSNIA AND HERZEGOVINA 2 FM EM Europe/Central Asia 8.44% 78.16% -4.98% BULGARIA 2 FM EM Europe/Central Asia 1.90% -2.17% 1.08% CROATIA 3 FM EM Europe/Central Asia -0.59% 33.66% 10.28% ESTONIA 2 FM EM Europe/Central Asia 9.20% 6.59% 2.52% KAZAKHSTAN 3 FM EM Europe/Central Asia -0.74% 25.49% 8.89% LITHUANIA 2 FM EM Europe/Central Asia 3.99% 44.17% 14.10% ROMANIA 4 FM EM Europe/Central Asia 6.02% 22.47% 0.06% SERBIA 2 FM EM Europe/Central Asia 2.56% 28.65% 0.15% SLOVENIA 3 FM EM Europe/Central Asia 0.75% -18.73% -36.29% UKRAINE 2 FM Latin America 20.50% 114.77% -9.85% ARGENTINA 6 FM Latin America -4.33% -18.91% -5.46% JAMAICA 2 FM Latin America 4.00% 25.01% 20.36% TRINIDAD AND TOBAGO 2 FM MENA -6.54% -7.39% -10.33% BAHRAIN 3 FM MENA 2.86% -5.31% -7.17% JORDAN 3 FM MENA -2.56% 3.51% -1.84% KUWAIT 8 FM MENA 0.92% 0.88% -7.98% LEBANON 5 FM MENA -0.01% 15.56% -1.42% OMAN 8 FM MENA 5.68% 29.60% 13.82% QATAR 13 FM MENA UNITED ARAB EMIRATES 10 -1.16% 62.62% 19.39% Global MSCI FM Index 143 1.78% 26.17% 4.89% AVERAGE 155 1.81% 24.47% 2.99% 5 Yr 1.64% 13.74% 22.85% 16.45% -3.33% 7.55% 3.27% 10 Yr 14.05% 20.67% 10.32% 13.50% 13.25% 11.19% 25.93% 9.82% 4.06% 1.15% 11.45% 26.49% 9.20% 24.72% 10.31% 5.82% 0.46% -17.10% 14.65% -0.50% 7.37% -19.36% -6.48% -0.38% -0.12% 3.89% 18.78% 15.26% 6.61% 7.28% 6.42% 10.71% 4.58% 13.82% 1.19% 12.08% 7.22% 10.70%
  12. 12. 2. Morocco (5) – The Country, The Economy and The Stock Exchange   The Stock Exchange – BUT RELATIVELY CHEAP AND ATTRACTIVE! RET Gross Total Performance; MSCI World Countries - Nov 2013 MSCI Index Market Type Region SCORE FM 0.2 Africa BOTSWANA FM 0.0 Africa GHANA FM 0.0 Africa KENYA FM 0.0 Africa MAURITIUS FM 0.3 Africa MOROCCO FM 0.1 Africa NIGERIA FM 0.0 Africa TUNISIA FM 0.0 Africa ZIMBABWE FM 0.4 Asia ex China BANGLADESH FM 0.2 Asia ex China PAKISTAN FM 0.6 Asia ex China SRI LANKA FM 0.7 Asia ex China VIETNAM FM 0.1 EM Europe/Central Asia BOSNIA AND HERZEGOVINA FM 0.4 EM Europe/Central Asia BULGARIA FM -0.6 EM Europe/Central Asia CROATIA FM 0.1 EM Europe/Central Asia ESTONIA FM -0.3 EM Europe/Central Asia KAZAKHSTAN FM 0.0 EM Europe/Central Asia LITHUANIA FM -0.2 EM Europe/Central Asia ROMANIA FM 0.2 EM Europe/Central Asia SERBIA FM 0.2 EM Europe/Central Asia SLOVENIA FM 0.1 EM Europe/Central Asia UKRAINE FM 0.3 Latin America ARGENTINA FM 0.2 Latin America JAMAICA FM 0.0 Latin America TRINIDAD AND TOBAGO FM 0.2 MENA BAHRAIN FM 0.0 MENA JORDAN FM 0.6 MENA KUWAIT FM 0.6 MENA LEBANON FM 0.7 MENA OMAN FM -0.2 MENA QATAR FM 0.0 MENA UNITED ARAB EMIRATES 0.3 Global MSCI FM Index AVERAGE 0.2 Normalized 0.0 P/B 2.28 5.44 4.25 1.62 2.66 2.83 2.13 3.61 2.46 2.64 1.90 2.38 0.48 0.48 1.25 0.98 1.05 2.65 1.20 0.66 1.19 0.36 1.30 0.71 1.82 0.96 1.10 1.74 0.93 1.47 1.92 1.30 1.72 1.80 1.75 Valuation Indicators P/E P/C YIELD 9.85 7.69 3.70 16.02 22.84 4.46 15.17 14.86 2.93 10.67 9.35 3.40 14.20 8.81 4.43 12.80 20.98 3.80 15.24 6.66 2.95 13.38 9.46 1.74 15.84 11.36 3.17 10.61 8.07 6.49 13.89 12.54 2.34 16.07 12.09 2.65 15.24 4.96 5.90 5.68 4.16 1.48 11.21 5.82 8.18 13.39 5.61 5.47 7.45 5.85 9.01 12.88 7.70 7.06 12.32 5.24 2.13 3.80 2.77 0.00 13.82 6.51 3.21 2.84 2.25 0.63 6.63 3.13 1.52 4.81 4.74 6.42 12.59 7.59 3.10 22.78 4.75 3.53 15.68 9.19 4.39 17.96 8.66 3.53 15.74 87.41 3.50 10.38 6.84 4.73 14.04 7.44 4.25 14.16 11.15 2.15 12.88 8.08 3.73 12.41 10.83 3.82 12.00 8.00 3.00 VAL LMG ROE SCORE SCORE 23.12 0.0 0.2 34.00 0.0 0.0 28.00 -0.3 -0.3 15.23 0.0 0.0 18.75 0.3 0.6 22.08 0.1 0.2 13.96 -0.1 -0.1 27.01 -0.3 -0.3 15.50 -0.5 -0.1 24.84 0.3 0.5 13.68 -0.1 0.4 14.81 -0.5 0.2 3.13 0.3 0.4 8.45 0.0 0.4 11.18 0.4 -0.2 7.30 0.4 0.5 14.12 0.8 0.4 20.57 0.3 0.3 9.74 -0.1 -0.3 17.36 0.3 0.5 8.60 0.0 0.2 12.72 0.3 0.4 19.56 0.5 0.8 14.70 0.8 1.0 14.43 0.0 0.0 4.23 0.0 0.2 7.03 0.1 0.1 9.70 -0.4 0.2 5.92 -0.3 0.3 14.21 0.3 0.9 13.66 0.3 0.0 9.16 -0.4 -0.4 0.3 13.31 0.0 14.90 0.1 0.2 15.00 0.00 0.0
  13. 13. 3. Morocco; Gateway to Africa? (1)  Africa: The World’s Ultimate Frontier Geographical Region II North Africa Saharan Africa West Africa Central Africa III East Africa Southern Africa LMG Investment Region I II I South Africa (35%)* North Africa (30%)* III Sub‐Saharan Africa (ex‐SA;  35%)* * = Strategic weights based on LMG’s Fundamental  Benchmarking methodology
  14. 14. 3. Morocco; Gateway to Africa? (2)  Ultimate Frontier With Potential South Africa Egypt Morocco Tunisia Algeria Libya Nigeria Kenya Ghana Angola Botswana Ethiopia DR Congo Tanzania Uganda Sudan Cote d'Ivoire Mozambique Madagascar Cameroon TOTAL AFRICA Population 52,982,000 84,605,000 32,950,000 10,889,000 38,295,000 6,323,000 177,096,000 43,291,000 26,441,000 21,256,000 2,096,000 86,614,000 74,618,000 45,950,000 35,363,000 35,150,000 23,919,000 24,491,000 21,852,000 20,930,000 1,099,755,000 GDP‐PPP $592.00 $548.80 $174.00 $107.10 $277.40 $78.63 $455.50 $77.14 $83.74 $130.40 $32.06 $105.00 $28.03 $75.07 $51.27 $86.67 $41.01 $26.69 $21.76 $51.61 Per Cap MV Stock Market $11,173.61 $855.70 $6,486.61 $48.68 $5,280.73 $69.15 $9,835.61 $10.68 $7,243.77 $0.00 $12,435.55 $0.00 $2,572.05 $50.88 $1,781.89 $14.46 $3,167.05 $3.53 $6,134.74 $0.00 $15,295.80 $4.11 $1,212.28 $0.00 $375.65 $0.00 $1,633.73 $1.26 $1,449.82 $1.79 $2,465.72 $0.00 $1,714.54 $7.10 $1,089.79 $0.00 $995.79 $0.00 $2,465.84 $0.23 2010 3.1% 5.1% 3.6% 3.1% 3.6% 5.0% 8.0% 5.8% 8.0% 3.4% 7.0% 8.0% 7.2% 7.0% 5.6% 2.5% 2.4% 7.1% 0.4% 3.3% 5.0% GDP Real Growth Rate (est) 2011 2012 2013 2014 3.5% 2.5% 2.0% 2.9% 1.8% 2.2% 1.8% 2.8% 5.0% 3.0% 5.1% 3.8% ‐1.9% 3.6% 3.0% 3.7% 2.4% 2.5% 3.1% 3.7% ‐62.1% 104.5% ‐5.1% 25.5% 7.4% 6.3% 6.2% 7.4% 4.4% 4.7% 5.9% 6.2% 14.4% 7.0% 7.9% 6.1% 3.9% 8.4% 5.6% 6.3% 5.1% 3.8% 3.9% 4.1% 7.5% 7.0% 7.0% 7.5% 6.9% 7.1% 6.2% 10.5% 6.4% 6.9% 7.0% 7.2% 6.7% 2.6% 5.6% 6.5% ‐1.9% ‐4.4% 3.9% 2.5% ‐4.7% 9.8% 8.0% 8.0% 7.3% 7.5% 7.0% 8.5% 1.8% 1.9% 2.6% 3.8% 4.1% 4.7% 4.6% 4.9% 3.0% 6.4% 4.9% 6.0% Source LMG Emerge MV Data from CIA Factbook (not MSCI) Expected GDP Growth Data from IMF (2013‐14), others CIA Factbook GDP ‐ PPP and MV Stock Market Data in Billions of USD
  15. 15. 3. Morocco; Gateway to Africa? The Ultimate Frontier’s Leaders Egypt, Cairo: The GSAM Next‐11  country and the Nile metropolis  will be back sooner or later,  carried by a large and  entrepreneurial population South Africa, still Africa’s nr 1  economy. And home of the Jo’burg Stock Exchange (SAF): Big and liquid  enough to make people think about  BRICS instead of BRIC Morocco: From Small in the EM  Index to Big in the FM Index and  with the ambitious Casablanca  Finance City plans on their way,  supported by Gulf money Nigeria, Lagos: Africa’s Biggest Population,  GSAM Next‐11 status, Oil‐rich Powerhouse in  West Africa. Misunderstood and feared by (too)  many foreign investors. But can one afford not  to be here? Nairobi, Kenya: In the country of great  runners the economy sprinted from  backward to advanced by African  standards. Metropolis in Eastern  Africa; home of a financial sector with  payment systems that are even  advanced by world standards
  16. 16. 4. Evaluation (1)  Conclusion Positive Challenge Stable Economy Absolutely But something needs to be  done about deficits Focus on International Co‐ operations Absolutely Find the right mix between  EU / France; GCC ; US ‘’Gateway to Africa’’ story  interesting new trump card Absolutely ‘Sell’ the country in a broader  setting (West Africa?) either  alone or together with other  North African countries Interesting new development  initiatives stimulate growth Yes, especially the ‘free trade  zone’ and ‘wealth fund’  models borrowed from  GCC/Saudi examples Casablanca Finance City: can  it work? Tourism/Real  Estate/Infrastructure Wealth  Fund? UAE/DUBAI EXAMPLE! Fight corruption Yes, but a minefield Maintain acceptable level of  freedom/liberal rights and  mixture of Western/French  and Islamic Law influences
  17. 17. 4. Evaluation (2)  Sectors Do’s Don’t’s Tourism Study government  plans/initiatives carefully Low budget Phosphates Larger scale firms Agriculture A lot goes; but make sure to  go for good quality and  export potential ‘Subsistence +’ farming Textiles & Apparel Yes; but focus on ‘style’ and  costs Excessive cost focus Morocco is not Bangla Desh! Information and  Communication ‐ Technology  and Related Services Look for specialized  applications with potential to  export into France, West  Africa and Arab world Local market General products Finance and Insurance Niche services focused on  West Africa and Maghreb not  offered by big banks/insurers; Islamic Finance; Big institutions with export  potential Forget this sector when you  don’t have a local partner  and/or knowledge of  international regulatory  framework and its (recent)  changes Sub‐components Yes, focus on low labor costs  and RELATIVELY reasonable  education levels Preferably co‐ops with  international brands or  international brand quality Locally good enough is not  good enough anymore!!! Real Estate A‐level plus (upper) Middle‐ Class Focus Excess leverage

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