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MSCI May 2018 SAIR playbook: Road paved for SWDY and EMAARDEV; Flagging Saudi positioning

Egypt and the UAE to attract highest inflows this SAIR. MSCI is due to announce the results of its upcoming May 2018 Semi Annual Index Rebalance (SAIR) on 14 May, with any changes effective starting 3 June for MENA markets. We believe the most prominent changes would positively affect SWDY EY and EMAARDEV UH, with combined flows of USD63.5mn. Looking beyond, while MSCI has a target of 4 constituents for the MSCI Egypt Index, only 3 stocks qualify in this SAIR. For the next rebalancing, the closest candidate is currently TMGH EY, with a full market cap of USD1.5bn and free float market cap of USD702mn, 1% and 11% below the thresholds. This is after considering the potential MNHD-SODIC merger (based on the current market cap).

Eyeing 14 potential additions with cUSD88.8mn in inflows. For the upcoming SAIR, we look for 14 additions across 5 markets. The most notable of these will be the inclusion of SWDY EY (expected flows = USD48.4mn equivalent to 12.2 trading days) into MSCI Egypt, as it: i) passes the liquidity threshold (3M ATVR of 46.9%, 12M ATVR of 46.0% vs. 15% minimum, ii) has a full market cap of USD3.0bn vs. a threshold of USD1.6bn, and iii) has a free float market cap of USD1.1bn vs. a threshold of USD788mn. The second notable addition to the EM Index should be EMAARDEV UH (expected flows = USD15.2mn equivalent to 4.8 trading days). Our calculations are based on 30 April prices, while MSCI will use any of the last ten business days of April.

22 deletions across 7 markets, with cUSD58.9mn in outflows. GTHE EY falls short of MSCI Egypt’s criteria, as it: i) has a full market cap of USD1.4bn vs. a threshold of USD1.6bn, and iii) a free float market cap of USD636mn vs. a threshold of USD788mn, but is likely to be added to the MSCI Egypt Small Cap Index, limiting net outflows to 4.9 trading days (USD17.5mn). Elsewhere, we expect heavier outflows in terms of trading days for WAA MC, seeing outflows of USD7.0mn, as much as 68.1 trading days.

Position for potential Saudi upgrade. Y-t-d, Egypt posted strong return, rallying 7.3% vs. an EM average of 2.1%, while the MSCI Egypt Small Cap Index rallied 21.9% vs. -2.0% for EM Small Cap. While we expect continued momentum in Egypt, a Saudi upgrade is worth giving greater attention to. In February, MSCI announced that Saudi would have a potential weight of 2.3% in the EM Index, if upgraded. It would, accordingly, be the third largest EM EMEA member, after South Africa (6.7%) and Russia (3.3%), with 32 members and a free float‐adjusted market cap of USD124bn. The decision is due in June 2018, with potential reclassification over two phases: May 2019 and August 2019. We believe that RJHI AB, SABIC AB, NCB AB, SAMBA AB, STC AB, ALMARAI AB, ALINMA AB, MAADEN AB, SECO AB, RIBL AB, BSFR AB, and YANSAB AB are best-positioned to join the EM Index, with USD1.7bn of potential inflows.