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MSCI August 2018 QIR playbook: Marginal rebalance across our coverage; Limited impact from China A-shares

Look for 1 potential addition and 0 deletions across 5 markets. We expect aggregate net inflows of USD15.81mn in the August 2018 Quarterly Index Rebalance (QIR), due on 13 August. We view Qatar as the only beneficiary, with estimated inflows of USD15.81mn, through the potential inclusion of 1 stock (small cap), We see no changes in the other markets (Egypt, Kuwait, Saudi Arabia and the UAE), but put EKHO EY [Overweight l TP USD1.30] on a watch list for a possible addition in MSCI Egypt Small Cap index.

NSCSA AB an imminent addition; QIIK QD qualify for inclusion in small cap. We believe NSCSA AB should join the Saudi Standalone index, with estimated flows of USD11.4mn, potentially increasing Saudi Index members to 42. We note that for the inclusion of a stock in the QIR rebalance, companies are required to pass 1.8x of both the FMC & FFMC cut-offs, unlike SAIR rebalances, where it is just 1x. QIIK QD in Qatar meets the requirement and stands at 1.81x FFMC cut-off, while QFLS QD (possibly to be included in Standard index) is at 1.69x FFMC cut-off, slightly below the cut-off by 6.5%. In Egypt, EKHO EY misses only one quarter, in terms of liquidity criteria, but meets all other requirements. As such, the stock could potentially get included in the Egypt Small Cap index, similar to previous MSCI inclusions, such as DP World’s [Overweight l TP USD26.0] inclusion in the UAE.        

MSCI EM China 5% A-shares next phase in August; limited impact on coverage. Phase 2 (2.5%) should have marginal impact, in our view, similar to phase 1 (2.5%) in the May SAIR. We expect the overall weight of our coverage to drop by 0.02% to 1.63%, starting Sep-18. The possibility of a 100% inclusion of the A-shares is the main risk and would bring down the overall weight to 1.44%, with expected aggregate outflows of cUSD105mn.

MENA outperforms MSCI EM, yet exposed to 2-layer migration risk in 2H18. MSCI inclusion of Saudi, Kuwait on the watch list, and Qatar increasing its foreign ownership were the main reasons MENA outperformed MSCI EM in 1H18, with a 13.94% return vs. -6.66% for MSCI EM. However, there is a global trend of pulling out of equities (MSCI ACWI saw outflows of USD196bn in 1H18), with relatively higher allocation to developed markets (MSCI WI saw inflows of USD170bn vs. MSCI EM outflows of USD373bn). With the lack of catalysts for MENA, the region is expected to correlate with EM, particularly with further tightening conditions.