MOROCCO
The Moroccan equity market rallied strongly in
September, drawing strength from reports of oil and gas
discoveries in the kingdom. The findings, which are
expected to dramatically change the face of the
Moroccan economy, would help to lessen the country’s
heavy dependence on the agricultural sector and make of
Morocco a net exporter of oil in a few years. Blue chip
stocks across the board reacted positively to the news and
investors’ enthusiasm was apparent in the substantial
increase in trading volumes.
Egypt
Sentiment was mostly positive in Egypt; however, the stock
exchange failed to uphold some gains realized in the month
of August with most blue chips witnessing consolidation.
Among the most demanded stocks were CIB, MobiNil and
OT, which together captured the bulk of trading activity.
Despite signs of improving domestic conditions, particularly
on the macro level, the market remains clouded by
uncertainty and tight liquidity condition. Nevertheless, investors
are bracing for the partial privatization of Telecom Egypt,
which is anticipated by the end of the year. The offering,
which will also include a GDR, is expected to rejuvenate
activity on the local bourse
JORDAN
Mixed semi-annual results for most listed concerns on the
Amman Stock Exchange kept sentiment subdued, with
the index hovering below the 140-psychological level.
Losses remain concentrated in the industrial and the
banking sectors, and to some extent, in the services sector.
Foreign investors continued to shun the market with
their sell orders outnumbering buy orders by JD5.9 million
in the first eight months of 2000. Accordingly, the
share of non-Jordanians in the listed companies stood at
41. 9% of market capitalization at the end of August, out
of which 36% is held by Arab investors and 5.9% by
non-Arab investors.
External debt under control in the Arab region
Successful debt management policies
have enabled several Arab countries
to reduce their external debt over the
past few years, most notably Egypt,
Morocco and Algeria. On the other hand,
other Arab countries, such as Lebanon,
Tunisia, Qatar and Oman, have been
accumulating higher levels of external
indebtedness. Among the indebted Arab
countries, Qatar and Jordan exhibited the
highest levels of external debt as a percentage
of GDP. at around 98% in 1999 for
both countries, while Oman and Egypt
enjoy the lowest levels, at 29% and 32%
respectively. Total external debt for the
eight Arab countries surveyed declined
from$118 billion in 1996to$113.8 billion
in 1997, but rose again in the following
two years toreach$117.9billion in 1999.
Those Arab countries that have a history
of debt rescheduling and those with a
high external debt burden will find it difficult
to attract foreign investment.
Capital always goes to those countries
who live up to their commitments and
where the risk of non-payment is low.
Besides, servicing large external debt eats
up a good portion of a country’s export
revenues, adds to its external imbalances
and puts pressure on the country’s foreign
reserves and its monetary stability.
Following the Gulf War in 1990, all of
Egypt’s debt to Arab creditors was cancelled,
as well as military debt owed to the
US, in recognition of the country’s support
to the UN coalition formed to liberate
Kuwait. This was followed by the cancellation
of half of the net present value of
the debt owed to the Paris Club ($22 billion)
and the rescheduling of the remaining
balance. As a result, foreign debt
declined from more than $46 billion in
1986 to about $28.2 billion in 1998/99,
representing 32% of GDP. Debt structure
is favorable and debt service/ exports
at less that 10% in 1999.
Lebanon’s external debt is expected to
rise in the foreseeable future as the government
gradually replaces part of the
expensive domestic debt, which stood at
a high of 126% of GDP at the end of
1999, with relatively cheaper dollar dominated
borrowing. Lebanon
tapped international markets in
September 1994 with the launch of its first
Eurobond, providing the government
with access to non-resident Lebanese,
Arab and foreign capital. Following a
series of Eurobonds, external debt rose
from a low of $772 million in 1994 to
$5,538 million in December 1999, representing
only 35% of the GDP and 25% of
the total debt outstanding. At the end of
June this year, the Lebanese Government
successfully issued a five-year Eurobond
for $500 million and is planning to issue
$500 million worth of 20-year
Eurobonds in the coming few months.
Total outstanding external debt of
Jordan at the end of 1999 stood at
JD5,186 million (US$7,312 million), or
98% of GDP, down from JD 6,052.5 million
(US$9,121 million) in 1990. By July
2000, total external debt dropped to
JD4,874 million (US$6,872 million).
Jordan• s largest creditors are the industrial
countries with whom the government is
negotiating debt rescheduling and debt forgiveness
agreements, and swapping some debt into local investment.
This should help reduce the country’s
debt burden, and with higher
growth in GDP this year, debt to
GDP ratio should drop below 90%.
Qatar’s LNG investment program,
financed by a huge stock of
external debt, led to the reversal of …_
the country’s position from a net
creditor up until 1994, to a net
debtor starting from 1995. The
country’s external debt (including
government guaranteed debt and
QGPC debt) reached $11.2 billion in
1999, accounting for 98% of GDP.
A new $500 million sovereign loan will be
launched this month, coming at the heels
of Qatar’s second Eurobond issue, which
in mid-June raised $1.4 billion. Debt
ratios are expected to improve beyond
the year 2000 on the back of sustainable
economic growth driven by growing natural
gas exports and higher oil revenues.
Total external debt in Tunisia stood at an
estimated $13 billion last year, equivalent
to 62% of GDP. The country’s external
indebtedness is manageable in light of
Tunisia’s easy access to external borrowing
and international bond markets. In
Morocco, prudent external borrowing
and active debt management policy has
substantially reduced the country’s external
debt from a peak of 130% of GDP in
1985 to $19.2 billion or 54% of GDP in
1999. The stock of external debt in
Algeria has declined from a peak of
$34.4 billion in 1996 to an estimated
$29.7 billion in 1999, equivalent to
62.1 % of GDP, and is further expected to
fall to $28. 7 billion by the end of the year.
It is imperative for the indebted Arab
countries to take all possible measures to
reduce their debt burden. Buying one’s
debt from the world’s secondary market at
a fraction of the nominal value and using
privatization proceeds to retire existing
debt are well-known measures for the countries of the region to follow
Global research
Highlights
Economic focus
United States
• As the presidential campaign heats up, both candidates have
released broad outlines of their fiscal plans, which would
drastically reduce the federal debt during the next decade. The
question is, would either candidate blow the surplus? Probably
not. Even assuming that federal spending rises faster than
the candidates expect, their fiscal goals could still largely be
achieved because the economy will probably perform better
than they expect.
• Both Bush and Gore use the budget baseline developed by the
Congressional Budget Office (CBO) to cost out their respective
plans. On that basis, accumulated surpluses over the next
decade would total nearly $4.6 trillion, more than enough to pay
off the existing $3 .5 trillion federal debt. Roughly half of that
sum, $2.4 trillion, reflects the Social Security surplus.
• Looking at the candidates’ figures, Gore’s proposals would
pay down about $2.8 trillion of federal debt by 2010, eliminating
80% of the currently existing debt by that time. Bush’s proposals
would pay down about $1.4 trillion of debt, eliminating 40%
of the existing total, plus accumulating about $1 trillion in self
directed Social Security accounts.
• Of course, candidates are traditionally unduly optimistic
about budget effects, and both Gore and Bush have undoubtedly
underestimated the cost of their spending programs. For
example, more than half of the extra spending in both plans is for
healthcare, an area of notorious cost overruns.
• Beyond the specifics of their policy proposals, both Bush and
Gore use a CBO baseline that assumes that real discretionary
spending will be flat for the next ten years, an assumption that
we think is too optimistic. The CBO also assumes that GDP
growth will average 2.75% during the net decade; the Fed now
appears to believe that the economy’s non-inflationary growth
potential is 4% a year. We think it’s even faster.
• If growth were to average 3.5% a year-still less than the Fed’s
estimate of potential, leaving room for a recession to occur –
federal revenues would be roughly $1.5 trillion more than
assumed in the CBO baseline. That means that higher revenues
from stronger economic growth would likely offset even sizeable
cost overruns in the candidates’ spending plans. In short,
the fiscal goals of Bush and Gore may actually be achievable,
at least over the ten-year period used in their budget planning.
• In our view, the net economic stimulus of either plan would
be too small to worry the Federal Reserve very much. Indeed,
if the new President were to carry out his tax and spending plans,
fiscal policy would actually become increasingly restrictive during
the next decade because federal spending as a share of GDP
would continuously shrink. We doubt that spending would be
quite that restrictive.
Bruce Steinberg, chief economist
Global view
• It stands to reason that economic growth is the ultimate
source of profits growth. It is also logical to think that investors
will probably see stronger growth in corporate earnings and
stronger equity-market trends in countries where economic
growth potential is high rather than low.
• With that in mind, we recently conducted a study – our Global
Ranking Systems (ORS) – that ranks 35 countries by their
economic growth potential. The goal is to help investors recognize
profitable opportunities in countries that might not
look particularly attractive today.
• What method did we follow? We identified five categories of
variables that help to gauge a country’s economic growth
potential. They are capital supply (which measures savings rates
and the performances of capital markets), people (the supply
and quality of human resources), technology (scientific and technological
capacity), government policy and social structure (the
growth orientation of government policy; social cohesion) and
risks (potential sources of economic instability). Each category
has five variables; for each variable, we ranked each country
from most-favorable to least-favorable, assiging an equal
weight to all variables.
• What did we find? Sweden had the highest total score. Singapore,
Australia and the US were in a virtual tie for second
place. At the other end of the spectrum, Russia beat Indonesia
and Pakistan or last place. OECD members accounted for ten
of the top 12 spots on the list; the lowest-scoring countries represent
a di verse collection of economies in Latin America, South
Asia and Eastern Europe • Not surprisingly, we found that the technology category had
the strongest effect on a country’s ranking because it displayed
the greatest variation among the economies we examined. The
people category displayed the least variation, primarily
because high scores on some variables tended to be associated
with low scores on others (for example, countries with poorly
educated and comparatively unhealthy populations generally had
rapid labor-force growth rates and low labor costs).
• The GRS would be of no use if it did not have a strong correlation
with GDP growth and equity-price increases. Our back testing
indicates that the GRS does a good job of explaining potential
growth over time. The correlation between country total
scores and GDP growth is very strong, after controlling for initial
per-capita GDP. Looking at equity-market performance, the
situation is similar: countries with high total scores showed higher
growth in equity prices.
•Fora full discussion of this topic, see our August 30 report, GRS:
Ranking the World’s Fast-Track Economies.
Michael Hartnett, senior international economist
Matthew Higgins, international economist
Strategy fOCUS
United States
• Style often equals substance, at least when it comes to investing
in stocks. That’s one of the messages that the market has
been sending during the past few years, when investment
style decisions have been among the most important influences
on performance.
• One style that investors always seem to keep in mind is small cap
investing. Right now, the small-cap sector seems to have
reached a kind of noisy equilibrium. The unusually wide performance
gaps between opposing investment styles have recently
moved closer to their normal relationships. We tend to think that
dramatic divergences in performance are probably a thing of the
past, but in the case of small-cap issues, valuations alone are unlikely
to trigger a sustained period of outperformance. In our view, a
new bull market in small-cap shares is in a state of arrested development;
whether and when it blossoms probably depends on factors
that go beyond matters of valuation or profits.
• A look at the past may provide some insight into the future.
On a long-term basis, returns on small-cap stocks showed an
enormous acceleration from 1973 to about 1983, and they have
generally underperformed since then. What accounted for the
surge? In a nutshell, investors in the 1970s and early 1980s had
only two obvious choices: watch their savings erode, or withdraw
their savings from low-return regulated accounts and participate
in the then-prevailing inflationary trends by owning
small-cap energy and mining shares. The choice was fairly clear,
and investors quickly rotated into the few areas of the economy
that prospered from the structural inflation that was building
up at the time.
• What’s going on now? If inflation were to reappear at some
point, investors have many more alternatives than they did 25
years ago. As a result, we doubt that another period of outsized
small-cap relative returns is likely now that the menu of financial
choices is much broader than it used to be.
• With the exception of the great run-up of 1973-83, small-cap
bull markets were cyclical affairs. We think that that is the kind
of revival that will eventually develop in the sector.
• History shows that most small-cap bull markets emerge in the
aftermath of a recession or painful soft economic landing.
Recessions often create the mix of factors needed to encourage
rotation back into small-company shares, including deep-discount
relative valuations (as investors rotate first into safer large cap
companies), easier monetary policy (creating upward
pressure on multiples and confidence in an earnings revival) and
easy comparison as the profits cycle finally turns.
• Monetary policy is an especially-important element in the outlook
for small-cap stocks for the rest of 200 and 200 I, in our
view, particularly because investors appear to think that profits
are peaking. An extended decline in interest rates has usually
been a prerequisite for a period of sustained outperformance
by small-cap benchmarks. For that reason, a buoyant economy
may deal a major revival in the small-cap sector of the market.
Another consideration is this: the weakness in technology
stocks has been much more pronounced in the leading small cap
indexes than in the S&P 500, and the same holds true for
financials. Those two areas must do better before small-cap
measures can outpace the S&P 500.
• Other factors may also contribute to delays in a small-cap
revival. One is that size may indeed matter, even within the
small-cap universe: a look at the Russell 2000 shows that the
fundamentally stronger companies appear to be bigger ones in
terms of market cap. In addition, the IPO market and, more
broadly, IPOs, secondaries and shares coming out of lock-up
translate into supply; that could also be a key element in the performance
of the small-cap indexes in the months ahead. As
usual, the underwriting calendar slowed down for the September
Labor Day weekend. The pipeline for the rest of the third quarter
and the fourth appears to be fairly heavy.
• On balance, our view of the small-cap sector’s prospects is this:
a major small-cap bull market will likely be delayed into next
year, but we think that the current low valuations of many stocks
offer attractive entry points for patient investors. In the climate
that we foresee, careful stock and sector selection will probably
become the main driver of returns for small-cap portfolios.
Christine A. Callies, chief US investment strategist
Technical focus
United States”
• The stocks market’s major averages rose by 4% to 8% for the
July-August period, but the advance appears to be maturing. A
fall correction may be more severe in the technology sector than
in the technology sector than in the market as a whole. We continue
to favor accumulating issues in the value areas of the market
during an expected fall setback.
• Whether the market’s recent upswing is the start of a durable
advance from the major averages’ spring lows or merely an
interim recovery from those lows that will be followed by
renewed weakness may depend on the sector of the market to
which one is referring. In the case of the technology sector, we
continue to believe that its summer performance sequence was
an interim recovery, or “B-wave,” that will likely be followed
by a second phase of weakness, or ”C-wave” decline, in coming
months before the entire correction is complete.
• The non-technology/growth “rest of the market” consists primarily
of a wide array of mid-to-small cap value stocks,
although many large-cap basic-industry/capital-goods issues
could also be included. Those stocks, in general, have been out
of favor or correcting for the past two to three years, but now
appear to be stabilizing or recovering on a gradual or nation- al basis.
The improvement in that wide array of stocks has lifted
the NYSE’s 25-week advance-decline ratio to its highest
level (1.27) since April 1998 and raised the percentage of NYSE
common stocks trading above their 200-day moving averages
to 63%, also the highest level since early 1998. A key difference
between now and then: in 1998, those figures were
declining from higher preceding levels; now they are rising from
lower levels and showing improving momentum. Although a
market reaction during the next couple of months would certainly
have some effect on those stocks, it would be part of an
emerging major uptrend rather than a reversal of it.
• Meanwhile, the recent catch-up in the previously laggard technology
sector may be the latest indication that the market’s
spring-summer recovery trend is in a mature stage. Moreover, if
that were to be followed by signs of a faltering in the recent leaders
(financial, energy, utility stocks), it would increase the evidence
that a fall pullback or corrective phase was unfolding.
• Against that background, we continue to recommend that trading
accounts raise cash reserves in coming weeks and that
longer-term investors buy on a price scale-down basis.
