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seeking an expedited path to inclusion within the major Stock indices. Given the NTP is seeking heavy involvement/investment from the private sector, we believe the measures introduced by the CMA to attract direct capital inflows to the country are likely linked with the larger NTP process. Growing confidence in the CMA’s market reforms and the potential for inclusion in the major indices could prove to be a meaningful basis for the market to rerate upwards.

Taking positive steps to accelerate MSCI inclusion
The Saudi Capital Markets Authority recently announced extensive changes to the Qualified Financial Investor (QFI) program, which should ultimately increase the ease of foreign access to the Saudi market. In particular:

(1) Individual foreign investors will now be allowed to own up to 10% of the equity in a company (up from 5%). The total limit on foreign ownership remains at 49%.

(2) CMA decreased the minimum AUM of QFIs to US$1bn from US$5bn (although funds with AUM’s below this level will be considered by the CMA).

(3) CMA introduced stock lending & covered short selling;

(4) CMA extended the settlement cycle to T+2 from T+0, effectively eliminating pre-funding;

(5) CMA effectively removed the concept of a QFI client, which would have prevented investors from using multiple fund managers to gain exposure to Saudi Arabia. This highly restrictive clause was a significant reason why many global institutions did not seek to gain QFI status; and

(6) CMA significantly reduced the amount of bureaucracy required to apply for and retain QFI status.

MSCI inclusion one step closer as accessibility increases
In our view, the range of measures the CMA is looking to adopt greatly enhances the accessibility of the Saudi Stock exchange and as such bring Saudi Arabia one step closer to inclusion in the MSCI EM index. Whilst we continue to see inclusion most likely from 2019 (with an announcement in 2018), the new changes indicate that a 2018 inclusion (with an announcement in 2017) is by no means out of the question. Indeed, whilst the timing of introduction of these new measures is likely to be 1H2017, a recent release of the draft proposals from the CMA suggested it could come as soon as 3Q16; although we await further clarification.

A higher weighting in international indices
Saudi Arabia is currently under consideration for inclusion in the MSCI EM index, potentially as soon as May/June 2018; although we believe 2019 is more likely. Saudi Arabia is currently not included in any of the Major global indices and as such its inclusion would have a profound effect on the market as it:

(1) leads to significant inflows of capital in to the market from both active and passive funds following the MSCI EM index and;

(2) significantly increases interest in the Saudi market as it gains profile and is no longer seen as off benchmark.

We see these factors as compatible with the NTP aim to boost capital markets.

Currently Saudi would be 1.4% of MSCI EM = US$10.9bn of inflows.
As per MSCI’s guidance, we use MSCI’s standalone Saudi market index as a template (released May 12th 2015) for Saudi stocks to be included in the MSCI EM index. The MSCI Saudi index currently contains 19 stocks (all listed entities on the Tadawul market) which are likely for inclusion in the MSCI EM index (were Saudi to be included). By taking the total market cap of these companies and multiplying them by the foreign

Merrill Lynch
GEMs Paper #26 | 30 June 2016 45
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