<table><tr><th>From:</th><th>Richard Kahn &lt;</th></tr><tr><td>Sent:</td><td>Wednesday, March 14, 2018 4:52 PM</td></tr><tr><td>To:</td><td>jeffrey E.</td></tr><tr><td>Subject:</td><td>Fwd: Other ways to trade Saudi</td></tr></table>

Richard Kahn
HBRK Associates Inc.
575 =exington Avenue 4th Floor
New York, NY 10022
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Begin forwarded message:

From: =/b>"Ens, Amanda" <████████████████████████████>

Subject: =/b>Other 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

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. Q1earnings 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

## Cole Mackay, CFA, =irector (cont.)

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 =research

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

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

## FULL REPORT (cont.)

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

## Commodities: As good as it gets for =PEC (cont.)

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
<u>MLI (UK)</u>

Hootan Yazhari, CFA
Research Analyst
<u>Merrill Lynch (DIFC)</u>

This report is intended for Coleman =ackay

## Commodities: As good as it gets for =PEC (cont.)

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

## Commodities: As good as it gets for =PEC (cont.)

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

## Commodities: As good as it gets for =PEC (cont.)

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%
×

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

## Commodities: As good as it gets for =PEC (cont.)

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

## Commodities: As good as it gets for =PEC (cont.)

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

✓

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