EFTA02507622

From: Richard Kahn < Sent: Wednesday, March 14, 2018 4:52 PM To: jeffrey E. Subject: Fwd: Other ways to trade Saudi Richard Kahn HBRK Associates Inc. 575 =exington Avenue 4th Floor New York, NY 10022 Begin forwarded message: From: =/b>"Ens, Amanda" < Subject: =/b>Ot her ways to =rade Saudi Date: March 14, 2018 at 12:48:07 PM EDT To: =/b>"rkahn"< > Reply-To: =/b>"Ens, Amanda" < Saudi trade continues to gain momentum as we head into March 28 FTSE decision, =ollowed by MSCI in June. Our base case is for a =ositive outcome for both EM index reviews. Tadawul +5% past 3 sessions =rinting new 3 year highs, Foreign inflows YTD at =1.35bn Recent headline on Aramco: Saudi Aramco likely to be =elayed to 2019. Delay not all together surprising giving complexity of =he transaction, delays in choosing the trading venues, as well as to =etter align the IPO with potential MSCI / FTSE index inflow =imelines • Crown Prince MBS will appear on '60 =inutes' on March 18th, one day before he =ands in the US for a 10 day tour, meeting Trump on the 20th. • Reform agenda picking up speed: Women Driving; =ntertainment/Movie Theaters; Welfare Programs; Market access reforms =amp; Intl debt issues EFTA_R1_01638374 EFTA02507622 Saudi Fundamentals are strong (see =ean-Michel Saliba's report from Jan. 29th below): • Growth has bottomed out • OPEC=is succeeding at rebalancing the oil market. Fiscal =djustment now sufficient to safeguard stability at cUS$60/bbl. • Equity strategy: =emain positive, outlook gains momentum - We retain our positive view on the =audi market as we see strong earnings momentum as well as increasing =ppetite for Saudi equities amongst global investors: Best way to access the trade: M1SAP (MSCI Saudi =rovisional Index) 32-name =SCI-owned index, that will rebalance into the full MSCI EM index upon =nclusion Trades =90m/ day based on bottleneck liquidity • Tradable on swap at lml.+90bps, std comm applies; also =ccessible on fully funded Luxembourg-listed warrant (MERRI1DT LX) 10 single stock names to own in Saudi. • Al Rajhi: BAML Top pick for 2018» =argest bank in Saudi » Reflation trade beneficiary » We =ee the bank continuing to deliver strong earnings momentum on the back =f: (1) Stand out NIM expansion given a unique cost of funding position =nd further policy rate hikes (2) a continued normalization in asset =uality driving CoR lower; (3) Higher loan =rowth than peers as it benefits from consumer loan growth (particularly =ousing) whilst taking share in the corporate market and (4) Al Rajhi is set to be a key =eneficiary from the potential forthcoming Saudi index inclusions. • NCB: We see NCB as a key beneficiary from the economic =iversification program the Government has introduced. Its large balance =heet and resulting ability to finance mega projects should allow it to =apture market share in the coming years. Further support will come from =aving the PIF as a major shareholder. We also see a sublime margin =utlook given NCB's ability to benefit from rising interest rates and =ond yields. SABIC: Expect strong earnings =omentum in FY18E driven by robust product prices as well as solid plant =perations. View company's intent to expand internationally as a =atalyst for unlocking balance sheet value. The company is expected to =e the largest constituent of Saudi MSCI EM Index (- 16%). Shares trade =t a 2018E EV/EBITDA of 7.4x, - 20% discount vs global peers. • Yansab: Given robust MEG pricing outlook (40% of =rofits, prices up 18% YTD) providing a healthy tailwind to earnings =his year, we expect an attractive dividend yield of 6% (top quartile =lobally) in FY18E/19E well supported by FCF yields of 9% and a net cash =osition. • STC: One of the main beneficiaries of index inflows into =audi. SIC has finally improved management representation to investors =ith the departure of the previous IR, and new team in place. =ignificant government receivables recovery to drive stock price for =ext two quarters, while Careem stake can provide some =ositive headline risk on valuations. • Jarir: We like Jarir for its potential to =ncrease its market penetration having increased its store count by 13% =ince August 2017 while maintaining its premium ROE of 53% and =ttractive dividend. • Al Tayyar : Stock will see a slew of =ositive catalysts over the next two quarters, particularly a second =ranche of substantial gov receivable recoveries in =1. 130mn SAR loss from associates in 2017 is a one off and should make =omps easier this year. Q1 earnings should see the first earnings growth =fter a very difficult 2 years. Makkah real estate REIT will also =rovide an uplift • Al Hokair: has massively under =erformed in Saudi index and consumer sector and should see substantial =mprovement in business in 2018 as LFL turns the corner and the company =usinesses a beneficiary from social reforms in the country. Debt =estructuring concerns likely behind us at this point, relief there =ould be the main catalyst for the name. Malath / Alrajhi Takaful: 2 of the top =otor insurers in Saudi secular growth trend in motor insurance sector =ver the next two years as the regulator clamps down on more than 50% =ninsured drivers while women driving to present multiyear volume growth =tory. Cole Mackay, CFA, =irector Emerging Europe, Middle East & =frica Equity Sales Bank of America Merrill =ynch 2 EFTA_R1_01638375 EFTA02507623 Office > This material was prepared by Sales personnel of =ank of America Merrill Lynch and is subject to the terms available at =he following link: http://corp.bankofamerica.com/business/smb/landing/emaildisclai=er/americas/global-markets "SALES =IEW ONLY" Global =esearch GEMs Paper #31 Saudi Arabia: growth bull, fiscal =ear 29 January 2018 Key takeaways Growth recovers as high oil prices allow looser fiscal, =ontain near-term deterioration. Mega-projects offer upside =otential • The oil price at which reforms now bring imbalances to low =id-single digit levels moves to US$60/bbl, =rom US$50/bbl before. • Earnings momentum, index events make us positive Saudi =tacks. Prefer banks, petchems. Top picks: Rajhi, Samba, Yansab, Sabic FULL REPORT Macro: =weet spot for now Economic activity has bottomed out as high oil =rices are allowing implementation of looser fiscal policy and =ontaining near-term fiscal deterioration. The government intends to =upport activity through a) a more gradual pace of fiscal reforms; b) =ntroduction of Household/Cost of Living Allowances and Private Sector =upport programs; c) introduction of structural reforms; and, d) the =aunch of mega-projects. The latter provides most upside potential to =ur average growth projections of 2.2-2.5%yoy. Fiscal reforms now need US$60/bbl to safeguard =tability 3 EFTA_R1_01638376 EFTA02507624 The oil price threshold at =hich the macroeconomic adjustment brings imbalances to low mid-single =igit levels moves to cUS$60/bbl, from our =revious assessment of =US$50/bbl. The revised Fiscal Balance program exposes the budget to =olatility in oil prices. Still, there are four ways in which =uthorities can improve on fiscal dynamics: 1) front-loaded energy =ricing reform; 2) privatizations; 3) proceeds from anti-corruption =rackdown; and, 4) phasing out of the Royal Order next =ear. Equity =trategy: remain positive, outlook gains momentum We retain our positive view =n the Saudi market as we see strong earnings momentum as well as =ncreasing appetite for Saudi equities amongst global investors. Our =iews are based on: (1) attractive valuation, with the Saudi market now =rading at a mere 3% premium to GEMs versus a historic premium of more =han 30%; (2) improving macro fundamentals; (3) the prospect for =ccelerating earnings, FCF and dividend growth on the back of reform =rograms, an expansionary budget and a more pedestrian pace of austerity =mplementation; and, (4) the potential twin index inclusion events in =018. Prefer =anks and petchems Within the Saudi market, our =reference lies with companies offering strong earnings and FCF =omentum, attractive valuations and dividend yields. In this regard, our =ector preference is tilted towards the banks and petchems, who we see as key beneficiaries from =he 2018 budget and revised fiscal balance program. We highlight Al Rajhi & Samba as our top picks amongst =he banks, Yansab & SABIC amongst the petchems. Elsewhere, given the inflationary =ressures on operating costs (e.g. expat levies, rising utility costs), =e are more selective; focusing on names that are least affected by the =egulations and that have attractive company specific growth =tories. Commodities: As good as it gets for =PEC OPEC is succeeding at =ebalancing the oil market. Our supply/demand balances reflect a =aster-than-expected market tightening due to improving cyclical =onditions, cold winter, and OPEC compliance. A gradual OPEC+ deal exit =ould keep spot and forward prices in a range with the market in =ackwardation, and preserve OPEC's long-run market =hare. Contents Macro: growth =ull, fiscal bear 2018 budget = expansions don't come cheap A US$20bn =rice tag for growth Government =timulus in the pipeline Revised =iscal Balance program - more growth, more risk Macro =able Equity =trategy: opportunity abounds as momentum picks up KSA trading =n line with GEMs despite improving outlook Banks =amp; petchems preferred; selective =lsewhere 4 EFTA_R1_01638377 EFTA02507625 National =hampions strategy remains attractive 2018 - the =ear of potential twin index inclusions Banks: budget =upports positive outlook Saudi banks =ey beneficiary of loosened fiscal policy 2018 shaping =p to be a strong year for the Saudi banks Consumer: =actors align for a more positive outlook Easing =usterity, higher growth boost disposable income Expat =evies: uniform fees, differentiated impact Petchems: government support to =ontinue for an extended duration Delay in =eedstock prices and electricity tariff hikes Types of =upport for the sector from the government Healthcare: no =urprises Telecom: =owards the end of the tunnel? Utilities: a =alancing fund to manage the transition Commodities: as =ood as it gets for OPEC Disclosures Research =nalysts lean-Michel Saliba MENA Economist/Strategist MLI (UK) Hootan Yazhari, CFA Research Analyst Merrill Lynch (DIFC) This report is intended for Coleman =ackay 5 EFTA_R1_01638378 EFTA02507626 From: Ens, Amanda Sent: Wednesday, March 14, 2018 =2:46 PM To: Ens, Amanda < Subject: MEGA Trade --> Long =audi... Global Equities MEGA — Europe Opening New MEGA Trade: long Saudi Equities ( Buy M1SAP on Swap / Liquidity $100mm a =ay) Potentially the EM Flow Story of 2018... if FTSE =ddition is announced on March 28th we expect an inflow of $5bn =n a basket which trades 100mm USD a day (50X ADV)... this is even =efore MSCI announcement in June where inflows could be substantially =igher The Most Powerful Macro Trades are when Macro =undemantals + Flow Meet... This is Saudi in 2018 Key Points: 1. Saudi has significantly underperformed Oil by 14% last = months. With the recent introduction of the citizens account =rogramme, subsidy cuts, pushing out the budget balance to 2023, and the =ews of increased handouts, Saudi should re correlate with oil and move =igher from here. 2. Saudi equities remain under-owned globally a foreign ownership of Saudi equities is at 1.3% vs Russia 70%, Turkey 55%, =outh Africa 50%, Brazil 45%, UAE 20%, Qatar 10% 3. Good liquidity vs other EMs but volume trading at lows =elative to history a Tadawul ADV close to all-time lows at $1bn (10yr range =s $1-8bn) 4. Major index events in 2018/19 with FTSE announcement =n 28th March next =atalysta FTSE announcement could =rigger inflows of up to $5bn . =ombined with the MSCI announcement later this year, potential active =nd passive inflows can total $15-$40bn. So the =otential of at least $20bn inflows on a basket which trades 100mm USD a =ay (200 Days Volume) ? 5. In comparison, during the MSCI UAE and Qatar =nclusions, UAE was trading 10% below historic avg @14x PE and rerated to 22x =nto MSCI EM inclusion with Dubai up +110% (vs +47% prey year). Qatar was =rading inline with historic avg @11x PE and rerated to 18x =SCI EM inclusion with Qatar up +60% (vs +9% prey year) 6. Saudi risk indicators at 2015 =re-crisis levels a Saudi 5yr =DS is trading at 76 vs 40-210 3yr range; SAR 2yr fwd suggests market is less =orried about depeg fears and forward points can be used as a macro hedge 7. Valuations & dividend yields remain =ttractive a Market trades at a 10% =iscount (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 =9th-23rd March. Talal marketing in US 23rd-27th =pril. Marwan in Trading MAR disclosure 6 EFTA_R1_01638379 EFTA02507627 Saudi has =nderperformed both Oil and EM in the last 6 months Saudi equities =emain under-owned globally Risk indicators are back to 2015 pre-crisis =evels. Saudi 5yr CDS down from 210 to 76 (note 40 was all time =ow) Valuations =emain attractive — Saudi trading at 10% below historic PE; =audi ERR now at 1.22 vs 0.4 in 2016 MEGA Open =rades Theme/Trade Trade =xpression Entry Date Expiry Entry Level Current Level Hit Ratio We think Fed rates =xpectations for 2019 remain on the low side with just marginally more =han 1 hike priced. Buy Dec18 =urodollar Futures (EDZ8) vs Sell Dec19 Eurodollar Futures (EDZ9) 07/02/2018 97.63/97.31 97.455/97.125 We do not think the =oE will hike as much as the Fed next year when markets are pricing =arginally more from the BoE. Buy Dec19 Short =terling futures (L Z9) vs Sell Dec18 Short Sterling Futures (L Z8) 07/02/2018 98.76/99.09 98.67/98.98 The risk for =quities is a further rise in yields led by higher real rates. Last time =0y real rates were here S&P was closer to 2720. Long SPX Mar18 =640/2600 put spread 7 EFTA_R1_01638380 EFTA02507628 28/02/2018 16/03/2018 10 0.00 X We see asymmetry in =URGBP. We expect EUR to react positively if Italy/Germany is neutral/ =ositive this weekend and ECB pricing to become firmer. On GBP leg, UK =olitical risk remain underpriced with odds of early election in 2018 =ncreasing Long EURGBP 3m =.91/0.94 call spread 02/03/2018 0.62% 0.45% X MEGA Closed =rades (Hit=Ratio Closed Trades = 77%) Theme/Trade Trade =xpression Entry Date Close Date Entry Level Close Level Hit Ratio Equities set up for hawkish BoE hike. =ignificant unwinds of FTSE longs into meeting. Dovish hike delivered =eans Long FTSE remains a catch up trade. Long FTSE Feb18 =550/7700 call spread for 42 offer (7476 ref) (rolled from Dec, 7460 =ef) 02/11/2017 11/01/2018 42 100 Dovish ECB priced in. With a 9x30bn =apering priced, risks skewed to higher core rates and/or tighter =preads both of which benefit SX7E Long SX7E Feb18 =40 calls (rolled from Jan, 134 fut ref) 24/10/2017 25/01/2018 0.9 3.3 We think Fed rates =xpectations for 2019 remain on the low side with just marginally more =han 1 hike priced. Buy Mar18 Eurodollar Futures (EDH8) vs Sell Dec19 Eurodollar =utures (EDZ9) 11/01/2018 07/02/2018 98.18/ 97.535 98.12/97.31 8 EFTA_R1_01638381 EFTA02507629 Positioning short/underweight. Positive =ews flow for Italy and Spain causing a squeeze in peripheral bonds and =quities Long equal =eighted basket of Telefonica; lberdrola; Enel; Unicredit & Santander 26/10/2017 15/02/2018 97.8 92.9 X Rates market =ontinues to re-price ECB. lyly Eonia is almost back at recent =ighs pointing to more upside for SX7E. Long SX7E Mar18 145 calls (40d, 142 ref) 25/01/2018 22/02/2018 2.85 0.2 X Russia is one of the =orst performing markets in 2017. Under-positioning and fundamentals =etting better Long equal =eighted basket of Russian Oil names: Gazprom, Lukoil, Rosneft 07/11/2017 22/02/2018 98.95 113.04 We think we are entering a period of =ncreasing volatility into the Italian Elections (4th March) and reduce =ur Long Equity exposure Long SXSE Mar18 =350 puts (35d vs 3406 ref) 22/02/2018 02/03/2018 39 58.40 We see Political =isk underpriced in Europe into 4 March (Italian elections and German =PD member vote) Short FTSEMIB Index via Mar18 futures (STH8 Index) 22/02/2018 02/03/2018 22505 22005 FTSE is the worst performing major =arket ytd. Moreover, we see asymmetry in GBP with UK =olitical risk underpriced and BoE hikes overpriced. We do not agree =hat the BoE can hike more than the Fed next year. Long UKX Mar18 =375 calls 07/02/2018 02/03/2018 55 1.50 X 9 EFTA_R1_01638382 EFTA02507630 The risk for equities is a further rise =n yields led by higher real rates. Last time lOy real rates were here =&P was closer to 2720. long SPX Mar18 =750/2700 put spread 28/02/2018 02/03/2018 15 30.40 This =essage, and any attachments, is for the intended recipient(s) only, may =ontain information that is privileged, confidential and/or proprietary =nd subject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are not the intended =ecipient, please delete this message. 2622642 This message, =nd any attachments, is for the intended recipient(s) only, may contain =nformation that is privileged, confidential and/or proprietary and =ubject to important terms and conditions available at http://www.bankofamerica.com/emaildisclaimer. If you are =ot the intended recipient, please delete this message. 2622644 10 EFTA_R1_01638383 EFTA02507631