Last month I visited the North African country of Morocco. I have not visited the country for some time but after a few meetings with some Moroccan banks in London, I thought it was time to research a few ideas.
The key change in the country’s outlook has been the rise of a domestic auto production industry. As seen in chart 1, in a span of four years, Morocco has more than tripled its auto production driven by investments by France-based auto companies. These companies have invested as the government improved Morocco’s infrastructure, ports and rail capacity to take advantage of its favourable trading relationship and historical linkages to the European Union.
Auto investments in countries like Morocco are also occurring in nearby Turkey and other parts of North Africa, hence as seen in chart 2, “MENA” production (aka Middle East North Africa) is gaining production share from the rest of the EU. This trend is similar to the trend we saw (and continue to see) in North America as auto production moved from higher cost areas like the northern US states to the US South (as well as Canada and Mexico).
And historically in my experience, the best means for an under-developed country to emerge is through USD-based manufactured exports. So potentially, if Morocco transitions from a more agriculture and materials based economy to a manufacturing based economy, it could start to move up the development curve. This would be quite positive for consumer incomes, credit demand and formalized retail growth.
In addition to the domestic opportunities, many Moroccan companies have been allocating capital to French-speaking West Africa as many global companies were selling their operations post-2008 global financial crisis. As discussed in previous blogs, one trend we follow is South African companies’ expansion to Africa to arbitrage a cheaper cost of capital and strong free cash flow in their home market. This trend, though, was primarily in English-speaking Africa (i.e. Kenya, Nigeria, Zambia, Botswana, Namibia, etc.). Moroccan companies, given their bi-lingual heritage (Arabic and French) have been investing in French-speaking countries like Cameroon, Republic of Congo, Senegal and Cote d’Ivoire. These investments, though approximately only 15-20% of Moroccan companies revenue, offer a long term structural growth opportunity with minimal competition - hence potentially higher returns.
Finally, given Moroccan companies are generally off most investors’ radars and valuations are in line with historical averages, I was able to find a few stock ideas that fit my investment process in the banking and housing sectors for the frontier portfolios. But given the early stage nature of the auto sector’s growth and West African investments, I plan to do more research and monitor closely the rise of this frontier country only about 15 km away from Europe.
Thanks for reading,