Two weeks ago I published a no brainer trade. Buying Saudi in anticipation of its inclusion into MSCI. It was announced today. Expect significant re-rating.

MSCI adds Saudi Arabia, in line with consensus, acknowledging impressive reforms; Kuwait is next in line
MSCI announced the inclusion of Saudi Arabia in the MSCI Emerging Markets Index effective June 2019, representing a weight of approximately 2.6% of the index with 32 securities. This will follow a two‐step inclusion process, the first of which will coincide with the May 2019 Semi‐Annual Index Review, while the second will be in August 2019 Quarterly Index Review. MSCI also announced the reclassification of the MSCI Argentina Index from Frontier Markets to Emerging Markets status. In addition, MSCI announced that it will include the MSCI Kuwait Index in its 2019 Annual Market Classification Review for a potential reclassification from Frontier Markets to Emerging Markets status.

This marks a strong acknowledgement of the reforms undertaken by the Saudi government, which included lower restrictions on international investors and the introduction of short-selling and T+2 settlement cycles. The decision was anticipated since the beginning of the year as MSCI praised Saudi’s efforts to introduce capital market reforms that aimed at opening the local equity market to international institutional investors. We recall that index provider FTSE Russell upgraded Saudi to Emerging Market status in March 2018.

Saudi officials expects USD40bn in inflows
The CEO of Saudi bourse expects minimum foreign inflows of USD10bn from passive funds with up to USD40bn over the next year from the inclusion, and he added during an interview with Bloomberg, that Tadawul is aiming to increase the foreign participation in the market from a current 5% to 20-25% in the next two years. We do not only see the inclusion as increasing foreign presence in the market and improving liquidity, but also as enhancing the quality of the flow entering the market, which we believe will be more geared towards long-term institutional investors that will provide a fundamental growth in the Saudi market. This will be magnified by the impressive reform story the country is providing amidst EMs. Aramco IPO will be another key trigger for the market, with a potential USD50bn of assets into the market. Saudi is the third GCC country to be granted MSCI Emerging Market status, as UAE (0.4%, upon inclusion) and Qatar (0.45%) were included in 2013. According to market reports, UAE and Qatar weights are currently much higher than when they were included in 2013.

I bought 8% weighting of my portfolio in KSA – ishares ETF that tracks Saudi Arabia. MSCI announced that it would include SA in their EM index. SA would become the largest country in the EM space. Each time this happened in the past, there was a 50% run. No brainer trade.

Foreigners ‘to inject billions’ into Saudi on MSCI inclusion

Kingdom could become ninth largest country on index if it wins EM status

We have been long SDSD for about 6 months. We are 25% up. We have bought more recently. The story is good and it is getting better. See below their latest presentation :

http://www.newsweb.no/newsweb/search.do?messageId=445256&siteLanguage=en

Presentation on the opportunity is enclosed

Manual of Ideas 2018 (Madalena)

For how long more?

I have invested into MDLNF a few months ago. The below article well summarizes why:

https://seekingalpha.com/article/4126330-madalena-energy-window-create-virtuous-cycle

The stock will come back. Opportunity to gain at least 20%

https://seekingalpha.com/article/4126630-gopro-market-overly-pessimistic?auth_param=5970b:1d16u0c:5e42552fa4877462dec0c0d999091dba&uprof=44

After a long time I saw an interesting idea on Seekingalpha that made me to increase my position in Senomyx by 50%

https://seekingalpha.com/article/4125405-senomyx-christmas-present-investors

What will drive the US currency? Three events will influence the USD faith:

• Rotation out of Treasuries. Us treasuries are 14 trillion USD market. The single largest owner is the FED with 4.5 trillion. Foreigners own around 65% of the residual paper, with Japanese and Chinese investors leading the rankings.  The trade has been great for them. The US deficit has been shrinking (mainly due to US oil production increases) and therefore treasury issuance has been decreasing. At the same time, FED was buying up most of the new issuance. There were very little treasuries left for investors. All this drove the rates down. Long treasuries was a trade of the past decade. This is now reversing. US tax reform, if approved, will drive the deficit up which will increase the supply of treasuries. At the same time, FED will start to reduce it 4.5 trillion pile of treasuries by 300 bln of treasuries per year. So the treasuries will face a double pressure on rates: due to increasing inflation (driven by imported inflation from EM) and due to an increase of supply of treasuries. Buying treasuries at the time of increasing rates is an unattractive proposition. Foreigners will be most likely selling their Treasuries holdings putting up pressure on USD. As they hold now more than 65% of the treasuries not owned by FED, the wave could be very significant. Both for the yields and for the USD.

• US tax reform. US companies have substantial cash holdings abroad. If the tax reform is enacted, the investors will repatriate their offshore capital holdings back to the US. This will most likely strengthen USD.

• Increase in US interest rates – traditionally, the most important driver for FX is an expectation of interest rates differentials. The most important are 2-year interest rate differentials. If one believes that inflation is starting to emerge, than interest rates will be affected. That would be putting an upward preassure on USD.

The question is which one of the above will prevail. Naturally, it should be the one with the biggest numbers. This means significantly weaker USD due to rotation out of treasuries. I believe that it is already happening. The evidence is in the interest rates. As mentioned it is mainly two years interest rate differentials that drive the rates. The US, two-year rates, are highest levels for the last eight years. Despite that, the USD has been weakening. It might be an indication that the importance of this driving force is lower than the force of the above. Get ready for a rollercoaster ride. 

What could save the USD? Only FED. Hawkish FED. Significant increase in USD interest rates would save the USD. I would not be my money on Hawkish FED.

OMV Petrom is more than 10% down in the last two weeks despite the oil price increasing over that period. The reason is the mishandled SPO by second largest shareholder Fondul Proprietatea. The sale of 2.5% at 0275 draw the price down.

This already happened once in October. At that time the announcement of the sale drove the price down and after the SPO the share price rebounded. See http://www.seekingalpha.com/article/4034808-omv-petrom-special-situation-oil-play-due-mishandled-spo-major-shareholder

The current SPO was three times oversubscribed with allocations at 36%. Rebound expected.