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Sailing South: Investment in North African Emerging Markets

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The North African states of Morocco, Algeria, and Tunisia lie just beyond the borders of Southern Europe. As investors look around for undiscovered emerging markets, how do these countries look?

Following the Arab Spring of 2011, the entire Arab world has received more attention in terms of the possibilities for democratization, economic revitalization, and also in terms of risks and opportunities for investment. The three western-most countries in the Arab landscape are all relatively small markets and exhibit differences both in their economies and the political risk factors they face.

Morocco is a liberalizing constitutional monarchy with a well-liked king devolving power in a more decentralized manner. Algeria is technically structured as a republic, but with tightly controlled political parties and little rotation of power-holders over time. It is effectively an authoritarian regime. Tunisia is an early transitional democracy in the process of consolidation, having ousted a regime not unlike Algeria’s. Although there is hope for meaningful change and advancement in Tunisia, the range of possible outcomes is currently quite wide. Although many people picture North Africa as a land of desert, the coastlines along the Mediterranean and the Atlantic Ocean are actually fertile, meaning that agriculture is still an important contributor to both the economy and employment in these countries. The entire region was known as a breadbasket as far back as Roman times. However, agriculture is an industry sensitive to drought, and so changing climate and rainfall patterns can wreak havoc with both economic and political stability in this region.

Table 1. Comparative Indicators for Morocco, Algeria, and Tunisia


Democracy Index categories: F=Free; PF=Partly Free; NF=Not Free. Source: CIA World Fact Book, The World Bank. Data accessed August 8, 2012.


All three of these economies are fairly small, both in terms of population and in terms of GDP size, and so they are probably more suitable for investing than trading and would require long-term time horizons to achieve satisfactory results, with expectations of interim volatility. All three countries are slowly liberalizing their economies and their polities. Of the three, Morocco has the most developed and accessible financial markets, as well as an MSCI index that starts as far back as January 1995. To give a sense of the market size, Morocco’s 2011 total market capitalization, estimated at 60.1 billion USD by the World Bank Group, is roughly the same size as AstraZeneca Group’s (AZN) market cap today.


Figure 1 shows comparative real GDP growth over three time horizons for these North African countries, adding Turkey as a comparable emerging market in the region, and France and the United States. Growth rates are annualized to equivalent annual compounding rates. It shows substantial long-term growth has taken place in each North African country, albeit tending to slow over time.

Figure 1: Recent Annualized Real GDP Growth Rates


Source: Economist Intelligence Unit. Data accessed August 8, 2012.

In each case, the growth rates are substantially higher than the developed countries over equivalent time periods, with the exception of Tunisia during the most recent three-year period, in which the disruptions of Tunisia’s political transition figure prominently. None of these countries have achieved the remarkable growth that Turkey has witnessed recently, and for now there is little reason to expect them to in the near future. In terms of the underlying economy, these growth rates are noteworthy even if they are not quite outstanding. Of the three, Morocco looks the most attractive from a growth perspective.

Figure 2 shows labor productivity growth in the three countries since 1995. It shows that Algeria has been having trouble generating consistent labor productivity growth, whereas Morocco and Tunisia have been more consistent over time. A similar chart of total factor productivity growth is qualitatively identical. Since part of the emerging market dynamic is about the advantages of bringing financial and technological capital to an inexpensive labor force, this suggests that—barring major policy changes of some sort—Algeria will continue to have difficulties maintaining growth outside of the hydrocarbon sector.

Figure 2: Labor Productivity Growth in North Africa (1995–2012)


Source: Economist Intelligence Unit. Data accessed August 8, 2012.



Figure 3 shows comparative inflation rates across the three countries. Prior to 1997, Algerian inflation was in the 20–30% range. Moroccan inflation rates remain low, whereas Algerian and Tunisian inflation rates have been trending upwards since about 2000. Lower inflation rates help explain lower levels of civil strife in Morocco: Overt challenges to political regimes are more typically about politics and political structure but they are often catalyzed by economic hardships. Tunisia’s rate has continued to increase even after the transition to provisional government, but the government still has some time to show that it can bring inflation under control. Present levels of inflation in Tunisia are not yet excessive, even if they are trending in the wrong direction.

Figure 3: Inflation Trends (1997–2012)


Source: Economist Intelligence Unit. Data accessed August 8, 2012.

Unemployment in the region is an issue and—like inflation—can be a catalyst for regime change and accompanying policy uncertainty. With unemployment, it is the direction of change that matters most, but the level and memory of recent history is still important. All three countries have employment challenges, although it is Tunisia which faces the biggest challenge in both direction and levels.

Figure 4: Official Unemployment Rates (1990–2012)


Source: Economist Intelligence Unit Data accessed 8 August 2012.

In Tunisia, employment and inflation pressures are credited with bringing on the ouster of President Ben Ali, and the disruption of that event does take some time to heal. However, with almost 1 in 5 Tunisians officially unemployed and inflation creeping upwards, it may not be long before the unemployed exhaust any savings they have and fuel more radical demands on the new government.

Algeria appears to have made much progress in bringing down unemployment over the years, and this is a resource that the government can tap to promote itself and its legitimacy. However, with inflation rates closing in on nearly 9%, unemployment really needs to fall lower before the possibility of renewed civil strife catalyzed by economic stresses can be dismissed.



Of the three countries, Morocco is the one with the most developed equity markets and for which data is available. The political-economic prospects for Morocco look the best of the three, but the market performance has been lackluster to date. Figure 5 shows the history of the FTSE’s Morocco All-Cap Index since August 2006, when data is available from Bloomberg.

Figure 5: FTSE Morocco All-Cap (ACMAR) Level

Figure 5

Source: Bloomberg. Data accessed August 15, 2012.

The chart shows that Morocco performed well up to the beginning of the recession, and then has been essentially stagnant or even losing value since the financial crisis low point in 2009. Over this period, volatility has been close to 17% annually, with only about 1.2% in price return. Dividends over the same period averaged around 2.8% for a little over 4% total at 17% annualized volatility.

In comparison, the S&P 500 total return index returned 4.5% at 18% annualized volatility over the same period. So Morocco’s equity market as measured by the FTSE Morocco All-Cap Index has delivered performance not substantially different from the S&P 500 since 2006.

In terms of valuation, this does not look like an optimal time to buy in Morocco. Figure 6 shows Morocco’s dividend yield and earnings yields compared to their historical range over the past six years for which this author has data. Current yields on the index are close to their lowest levels on record in both earnings and dividend terms.

Given that the levels of volatility are unlikely to decline substantially over their recent history of 17%, these yields offer paltry inducements to put one’s money at risk. A current P/E ratio of 60 reported by Bloomberg is high on absolute terms (the S&P 500 at the time of the tech bubble reached 40), and it is certainly very high for a country with the kinds of economic, currency, and political risk faced by Morocco.

For all the positive expectations on the economic front, investors in Morocco seem to have bought into Moroccan stocks too readily.

Figure 6: Valuation Indicators FTSE Morocco All-Cap Index Historical Range from August 2006–August 2012

Source: Bloomberg. Data accessed August 15, 2012.


As investors search for emerging markets as possible sources of growth, it is natural to look to North African countries for possible investment. These countries are relatively close to developed markets that they can export to, and they appear to be liberalizing both their economies and their polities. Of the three countries discussed here, Morocco appears to have the most attractive profile in terms of high growth rates, low inflation, relatively low unemployment rates, a relatively lengthy experience with stock markets, and a liberalizing regime with an apparently well-liked monarch. Valuations look quite unattractive at the moment, however, and investors would be well-served to wait for better prices to emerge.

Algeria is more problematic, with lower growth, higher inflation, more friction between civil society, and a political regime which is democratic in its outward appearance but not its actual structure. Algeria does have the advantage of hydrocarbon resources to empower the state for now, but this kind of empowerment generally puts investors—particularly foreign investors—at a disadvantage. One would want to see the diffusion of local tensions, a reduction in cronyism, and clearer support for independent financial markets before taking on any more than the smallest quantities of risk in Algeria.

Tunisia is a middle case. It is certainly riskier than Morocco, because recently transitioned governments are highly unpredictable, but it also may open itself substantially to access capital markets. However, it is also possible that Tunisia may turn to a more closed and religiously run society simply in order to make a break with the secular and western-friendly policies of ousted President Ben Ali. It is simply too early to tell. On the other hand, Tunisia is the wealthiest of the three and the one with the highest levels of human capital. It would seem that Tunisia would be well suited to be a regional source of intellectual capital and IT expertise. It would be risky, but not completely unwarranted to place small amounts of portfolio exposure into Tunisia at this juncture.

–Bruce P. Chadwick, PhD, CFA, is principal at Chadwick Consulting, an independent consulting firm specializing in quantitative, emerging-market, and SRI research and strategy.

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