We are happy to say that we came out of turbulent month of May with only a few minor scratches. Africa proved to be mixed bag in terms of performance ranging anywhere from Egypt’s -12.11% to Ghana’s +9.37%. The markets of the Middle East seemed to have imported a deal of negative global sentiment. In our view, it only make this cash rich and ideally located part of world even more attractive for investors. The same goes for fixed income, while the credit scores across the region remain very solid, the market can’t seem to help but sprinkle a pinch of globalised risk aversion all over it. That said, from a relative perspective, the damage was limited during May. Please have a look at our monthly updates on www.silkinvest.com for more in-depth coverage of these markets and for an update on the performance of our funds.
The countries from Mars
Youssef Lahlou, our Casablanca-based head of Maghreb tells us more about what lies behind the amazing reality of Moroccan and Tunisian economies. So amazing that recently one of my colleagues jokingly exclaimed: ‘Are these countries from Mars?’
The impressive performance of these stock markets would make you think that they belong to a different world, and in many ways they do. So far this year, both markets have risen over 15%, in doing so they are on a completely different tack than most other markets.
As a result of recent economic reforms, Morocco and Tunisia stand among the few Mediterranean countries which have been sheltered from the repercussions of the international financial crisis and more specifically, the negative effects that are currently pestering the Euro Zone. This is amazing and it challenges traditional perception the both countries very much have a symbiotic relationship with Europe.
The North-Western corner of Africa is also known as the Maghreb region (in the Arabic languages, the meaning of ‘Maghreb’ refers to the place where the sun sets). Both countries found themselves in a position of strength when the last global economic crisis struck. The enviously constructive reality of Morocco and Tunisia’s economies comes as a result of a range of macroeconomic and structural reforms that were introduced over the last few years. Investors are now clearly observing the results of these policy efforts and they are starting to believe in the fundamentals that have are lifting these countries to a higher level.
Many will attribute the fact that the Maghreb markets remained insulated from the global crisis because of capital flow restrictions, shallow financial markets (in other words a limited amount of panicking foreign investors) and conservative exchange rate policies (mixed currency baskets). While these arguments are all valid, we believe there are other important factors that are contributing to the Maghreb’s bright future.
Actual daily flows from foreign Institutional Investors are below 15% in both markets and the local Institutional Investors, who are very well aware of the growth dynamics at home and less influenced by global market sentiment. They are carrying the ball on this pitch.
Despite the fact that remittances to both countries from citizens living abroad have slightly dropped over the past couple of years, they still do play an important role in supporting both capital formation (saving) and consumption.
More importantly, during the past 3 years, abundant rainfall has allowed the agricultural sector in Morocco and Tunisia to thrive. This is very important to highlight because agriculture is a high contributor to domestic production and counts for around 20% in Morocco and 12% in Tunisia as a share of GDP. This sector also provides employment to a respective 40% and 20% of the local labour force. As a result, household consumption in rural areas has risen while food imports have declined. According to the Moroccan Ministry of Agriculture, the sector grew by more than 30% between 2005 and 2009 alone!
Recent policy driven reforms have aimed to attract more large-scale Foreign Direct Investment (FDI). We point out the enactment of a new development plan which seeks to boost spending in specific industries and sectors such as transport, telecommunications and off-shoring. These efforts have succeeded in luring more foreign investors to see both countries as an interesting place to do business.
Morocco and Tunisia’s expanding list of trade partners should also help foster broader market access for exports. Free trade agreements within the region and with the EU offer enormous potential for both economies. The most recent example of this drive is the Agadir Agreement, which embodies the creation of a free trade zone between Jordan, Morocco, Tunisia and Egypt. Apart from creating a common market of around 120 million consumers, it is designed to help countries meet the Pan-Euro-Med rules of origin more easily.
This initiative should essentially be seen as a first step towards a broader Euro-Mediterranean free trade zone. The partnership is still in its early stages and the agreement offers great potential by increasing access to EU and US markets for the member states. Furthermore, both countries have also expanded their trade networks through a number of other bilateral agreements such as those with Libya and Turkey.
You may also recall that in a previous focus on the Moroccan banking sector, we spoke about the regional expansion of the financial sector across Western Africa (Two Atlas Lions seeking dominance in Africa).
Finally, in order to stimulate more entrepreneurial activity, both governments have enacted a series of investment-friendly reforms, including both the elimination of the minimum capital requirement for limited liability enterprises.
It is very clear that there is a game plan at play here to broaden the value proposition of these economies beyond manufacturing, tourism and agriculture. In today’s challenged world, the boldness, the ambition and vigour of these two African Lions* is rather inspiring, especially when we consider that most of their Mediterranean neighbours are very much playing on the defensive these days.
*At Silk Invest we call the fastest growing and leading economies in Africa Lions as they lead the pack of countries up the development scale, hence the name of our African equities fund: the Silk African Lions fund.
As always, if you would like to discuss this story in more detail, please don’t hesitate to get in touch with us. We look forward to keeping you updated.
With kind regards from the Silk Invest team
Baldwin
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