UBS Securities Israel CEO Ady Vigodsky and analyst Roni Biron remember well May 26, 2010, when Israel was included in the MSCI developed markets index. Now, three years later, during which time trading volumes on the Tel Aviv Stock Exchange (TASE) plummeted and foreign investors almost completely vanished from the local capital market, they can smile.
"Since the beginning of the year, we've see a greater willingness by foreign investment institutions to invest in Israeli stocks, Vigodsky told "Globes" in an interview. "Some has changed in the recent months."
Something has definitely changed in the TASE since September. The Tel Aviv 25 Index has risen by 15%, to almost touch its all-time high. At the same time, trading volumes have increased by 40% and equity mutual funds are raising capital at a record rate. The bond market is hot, and the market in general is in a state of euphoria, which may be disconnected from the general economic situation.
All this is already known. What many people are missing, says Vigodsky, is that behind many of these events are "foreign investors who have been seeking opportunities in stocks, and who have been exposed to the Israeli market."
"Globes": Maybe the foreigners' interest is temporary?
Vigodsky: "I don’t think that this is a one-off event, because we're talking about investment managers who were unfamiliar with Israel before. Only now are they discovering the existence of defense stocks in Israel, such as Bezeq and the banks. I think this is because more and more eyes have turned toward Israel lately, and because of cycles in foreign markets."
Biron: "Foreign investors are studying and examining Israel, but we have no delusions: the door opened because Israel is part of a global trend. If the situation in stock markets around the world continues to improve, foreign investors will continue to show interest in Israel. If the markets make a U-turn, we'll suffer."
Vigodsky: "Investments that are far away geographically are always those that are cut first, but that doesn’t change the fact that we have something to sell. The moment the situation changes, and the market contracts, the focus of foreign investors will return to their home turfs."
Are you saying that the turnover on the TASE basically relies on foreign investors?
Vigodsky: "In our opinion, they are behind the recent rally, and it's obvious that foreign investors are the TASE's biggest problem. The committee established by [the chairman of the Israel Securities Authority who, in April, set up a committee to make trading more sophisticated and increase liquidity on the TASE] mentioned this subject in its interim report, saying that more aggressive marketing by Israel in the world was needed."
Biron: "Everyone knows that the issue of foreign investors is critical for the TASE, but for some reason, no one is really dealing with it. If the new TASE CEO wants to restore the TASE to what it used to be, he'll have to get the Israel included in the MSCI Europe index. We were very close to inclusion in this index, and I think that the new TASE CEO should continue to work on this, because it will result in a great change. It must be his priority."
Vigodsky: "I cannot understand how, on one hand, they think that foreign investors are a factor for trading in Israel, while they don’t approach traders like us on the other hand. After all, we're in contact with foreign investors, and we know what they want and what they're seeking. Why not ask us about the set of tools that the TASE currently lacks?
What do you think should be done?
Biron: "There should be a serious campaign to expose foreign investors to the advantages in the Israeli market. They should know that Israel isn't the country of war that they are familiar with from the news, and that we have a good economy and attractive capital market."
Vigodsky: "It should be remembered that, in the past decade, local investors have been channeling more and more money to foreign markets, and justifiably so. Investors in Israel have always focused on the local market, so the channeling of money overseas, which I think will continue, may be bad for the TASE, but right for investment institutions. This only highlights how much we need the presence of foreign investors here."
Biron: "The measures that have been mentioned to save the TASE are good and positive, but they're less effective with regard to foreign investors."
Looking differently at Israel
Israel's reclassification as a developed market was supposed to be good for the economy. In theory, the change made available a large reservoir of investors who had previously refrained from investing in Israel because it was classified as an emerging market. It was clear to everyone that the reclassification might also cause a wave of departures by investors, but no one expected its actual scale.
Since that day in May 2010, trading volume on the TASE has fallen 45%. Obviously, the reclassification was not the only factor for the current situation (traders also blame the regulator), but it is clear that the reclassification played an important role.
"There is no question that Israel should have left the emerging markets index. The problem is that we're so small in the new index, it's as if we don’t exist. No one has to invest in Israel, because we're not part of the benchmark, so it's always possible to talk about smaller and more selective investments," says Biron.
Biron is referring to the change Israel's share of the indices from 2.87% in the MSCI emerging markets index, to just 0.37% in the MSCI developed markets index. However, there is also a fundamental change in the character of investments between an emerging market and a developed one. In general, investment funds invest in emerging markets by country, but invest by sector in developed markets. If before Israel's reclassification, local companies competed with each other for foreign investors' money; they are now competing against their foreign peers in the same sector.
UBS Israel is taking steps to bring foreign investors back to Israel, such as investor conferences like the one held at the UBS office in London. "UBS is the only institution that has held an investors conference about Israel outside the country, which is the best indication of foreign investors' interest in it," says Vigodsky. "Previously, foreign banks held such conferences, where CEOs and CFOs of Tel Aviv 25-listed companies met fund managers and analysts on the basis of their sectors. Since Israel was reclassified, we've been almost alone."
What are your impressions from the last conference?
Biron: "Foreign investors are looking at Israel differently. They're slowly learning about Israel and are including it in their investment portfolios. It's not the same level of interest as before, but still, when an Israeli bank holds eight consecutive meetings with large investment institutions, that is definitely a good sign."
14 executives from Israeli companies attended the UBS investors conference this year. The list includes executives from Bank Hapoalim (TASE: POLI), Bank Leumi (TASE: LUMI), Israel Discount Bank (TASE: DSCT), Mizrahi Tefahot Bank (TASE:MZTF), Israel Corporation (TASE: ILCO), Israel Chemicals Ltd. (TASE: ICL), telcos Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ), Cellcom Israel Ltd. (NYSE:CEL; TASE:CEL) and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), real estate company Azrieli Group Ltd. (TASE: AZRG), food company Strauss Group Ltd. (TASE:STRS), Delek Group Ltd. (TASE: DLEKG), Ratio Oil Exploration (1992) LP (TASE:RATI.L), and Frutarom Industries Ltd. (TASE: FRUT; LSE:FRUT; Bulletin Board: FRUTF).
"From the foreigners' perspective, this conference was an extraordinary platform, because in one day they met a group of companies for potential investments. This was an outstanding opportunity for both sides," says Biron.
What do you think they're missing?
Biron: "The entire gas sector. In addition to the geopolitics, there is the problem that, except for Delek Group, all the companies are limited partnerships. This is a problem for foreign investors, and makes Delek Group virtually the only option. Nonetheless, we're talking about a company with holdings in sectors, such as insurance, which foreign investors don’t like being exposed to. That is why most of the trading in this sector is by Israeli investment institutions."
Vigodsky: "There is no doubt that we much to offer foreign investors. Israel has a good economy, well-managed companies, and quite a few investment opportunities, which is why we should hope that this trend of channeling money to equities continues."
Published by Globes [online], Israel business news - www.globes-online.com - on November 20, 2013
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