Fwd: MEGA Trade --> Long Saudi...
Global Equities
MEGA — Europe
Opening New MEGA Trade:
Long Saudi Equities ( Buy M1SAP on Swap / Liquidity $100mm a day)
Potentially the EM Flow Story of 2018... if FTSE addition is announced on March 28th we expect an inflow of S5bn in a basket which trades 100mm USD a day (50X ADV)... this is even before MSCI announcement in June where inflows could be substantially higher
The Most Powerful Macro Trades are when Macro fundamentals + Flow Meet... This is Saudi in 2018
Key Points:
Saudi has significantly underperformed Oil by 14% last months. With the recent introduction of the citizens account programme, subsidy cuts, pushing out the budget balance to 2023, and the news of increased handouts, Saudi should re correlate with oil and move higher from here.
Saudi equities remain under-owned globally a foreign ownership of Saudi equities is at 1.3% vs Russia 70%, Turkey 55%, South Africa 50%, Brazil 45%, UAE 20%, Qatar 10%
Good liquidity vs other EMs but volume trading at lows relative to history a Tadawul ADV close to all-time lows at $lbn (10yr range is $1-8bn)
Major index events in 2018/19 with FTSE announcement on 28th March next catalyst FTSE announcement could trigger inflows of up to $5bn . Combined with the MSCI announcement later this year, potential active and passive inflows can total $15-$40bn. So the potential of at least $20bn inflows on a basket which trades 100mm USD a day (200 Days Volume) ?
In comparison, during the MSCI UAE and Qatar inclusions, UAE was trading 10% below historic avg @14x PE and rerated to 22x into MSCI EM inclusion with Dubai up +110% (vs +47% prey year). Qatar was trading inline with historic avg @llx PE and rerated to 18x MSCI EM inclusion with Qatar up +60% (vs +9% prey year)
Saudi risk indicators at 2015 pre-crisis levels a Saudi Syr CDS is trading at 76 vs 40-210 3yr range; SAR 2yr fwd suggests market is less worried about depeg fears and forward points can be used as a macro hedge
Valuations & dividend yields remain attractive a Market trades at a 10% discount (13.5x) to its historic PE (Saudi PE range is 10-26x). Avg dividend yield is 3.6% with 5 stocks yield more than 4%.
Our Middle East Team ready for Calls - Hamdy Hamoudi in London next week 19th-23rd March. Talal marketing in US 23rd-27th April. Marwan in Trading
MAR disclosure
Saudi has underperformed both Oil and EM in the last 6 months
Saudi equities remain under-owned globally
Risk indicators are back to 2015 pre-crisis levels. Saudi 5yr CDS down from 210 to 76 (note 40 was all time low)
Valuations remain attractive – Saudi trading at 10% below historic PE; Saudi ERR now at 1.22 vs 0.4 in 2016
MEGA Open Trades
Richard Kahn
HBRK Associates Inc.
575 Lexington Avenue 4th Floor
New York, NY 10022
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