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Morocco Expands Its Vistas

The following is adapted from our third-quarter report for the Frontier Emerging Markets Equity strategy. Click here to read the full report.

You can see Morocco from Europe, nine miles away from southernmost Spain across the Strait of Gibraltar, yet the African nation flies under the radar for many global investors. Nevertheless, Morocco’s US$150 billion economy is one of the most developed in Africa, featuring advanced infrastructure that has improved the quality of life for its 38 million inhabitants, facilitated trade, and encouraged private investment. Now the country is embarking on an ambitious program to boost growth even more over the next decade.

The government is focused on a “new development model” agenda that aims for a cumulative annual growth rate in income-per-capita of 6% through 2035. It plans to spend about US$100 billion between now and 2030 on infrastructure, covering everything from improving irrigation to reducing carbon emissions to rebuilding housing after last year’s earthquake.

Over the past two decades, Morocco has achieved remarkable macroeconomic stability compared to other frontier markets, a result of prudent monetary and fiscal policies. The country has more than 1,100 miles of highways, one of the largest container ports in Africa, Tanger Med, and the first high-speed trains in Africa. The kingdom spends 5.5% of GDP on education, and is turning out 24,000 engineers annually from its nearly 200 technology-focused universities and institutes. The country also offers investment incentives to industries such as autos and pharmaceuticals, and has established free-trade agreements with more than 50 partners.

Morocco has been consciously trying to shift its economy away from more volatile sectors such as agriculture via a deliberate industrialization strategy that’s resulted in a more diversified economy. Sectors such as automotive and aeronautics have been growing at a faster rate than traditional sectors. As a result, the contribution of those traditional sectors to total exports has fallen from 44% in 2010 to 25% in 2023.

By the time the soccer World Cup arrives in 2030—the country is co-hosting alongside Spain and Portugal—Morocco expects to show off a vibrant, growing country that will attract both tourists and foreign investors and can be a lasting bridge between Africa and Europe.

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Japan’s Mid-Quarter Market Turmoil Ends in Recovery for Fast-Growing Small Caps

An unexpected interest-rate increase from the Bank of Japan helped ignite a market firestorm during the third quarter.

The central bank’s decision in late July caused a swift appreciation in the yen, a currency shift that disrupted the widely used strategy known as the yen carry trade, where investors borrowed at low Japanese rates to purchase higher-yielding foreign assets. The rapid unwinding of these positions, combined with weaker US economic data and disappointing earnings from US technology giants, culminated in a 12% drop in Japan’s Nikkei index on August 5, while expected volatility in the US equity market spiked to a level not seen outside of major crises.

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Chinese Stocks Get a Jolt

Chinese stocks in September had their best week since the 2008 financial crisis after officials unveiled a new set of stimulus measures. The MSCI China Index surged 25% in just the last nine trading days of the third quarter, erasing 20 months’ worth of losses. Unlike other stimulus measures over the previous two years, this one was more comprehensive and included two key financial measures: a 50 basis point cut in the reserve requirement ratio for banks and a 20 basis point drop in the seven-day reverse repo rate.

There were additional measures aimed at boosting the real-estate sector, which rebounded by about 50% in late September, as seen in the chart below. The policy announcements included cutting mortgage rates for existing homeowners by as much as 50 basis points and cutting the down payment requirement for second home purchases by 15%.

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Momentum Investing and the Power of FOMO

The following is adapted from our third-quarter report for the International Equity strategy. Click here to read the full report.

Over the last 18 months, disciplined fundamental investors have been challenged by an episode of price momentum concentrated in a few of the largest stocks in the market. Price momentum refers to a phenomenon where securities whose prices have risen are more likely to keep rising in the short run, while those that have fallen are more likely to experience further declines. The concept of momentum has garnered sufficient adherents to secure its place in the pantheon of portfolio analytics and inspire the creation of numerous indices and ETFs designed to exploit it.

We have deliberately resisted incorporating the momentum factor into our investment process for several reasons. First, simple price momentum does not provide a fundamental basis for making investment decisions. Serial correlation of share price changes has, at best, a weak connection to the underlying business you’re investing in, and nothing to do with what it is worth. Second, momentum investing is literally “chasing” stocks that have already gone up or outperformed (or selling those that already went down or underperformed). This approach leads to higher turnover and trading costs. Lastly, although momentum investing has shown net positive returns over very long periods, there is considerable volatility in its return path. Momentum works until it doesn’t, and when it doesn’t, all the gains you made can be reversed more quickly than you can exit the market. This whipsaw effect makes momentum investing much harder to stomach in practice than it appears in theory.