At a Merrill Lynch presentation this morning, Merrill Lynch analyst Haim Israel said, "We believe that Israel can expect to be classified as a developed market before the end of 2009."
Merrill Lynch expects Israel to be added to the MSCI developed market index this year, with the announcement coming in June, and actual implementation in November.
But the analyst explained that though emerging market index investors will quickly sell their Tel Aviv Stock Exchange (TASE) holdings, as Israel is removed from that list, developed market index investors will be slower in adding Israeli investments. Israel, which accounts for 3.17% of the MSCI emerging market index, will only account for about 0.34% of the MSCI developed market index. Additionally, index fund managers often have the ability to overweight or underweight their holdings compared with the benchmark.
Greece was the last market to be upgraded from emerging market to developed market, in 2001. The short term effect on the stock market in that country was negative. But in the longer term, Merrill estimates that the TASE may see net investments of over $2 billion.
However, Merrill calculates that Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) carries a very large weight in the Israel index, and investors an simplify their holdings by buying only Teva, while still participating to a large degree in TASE performance.
In fact, Merrill notes that foreign investors will be able to invest in 5 large capitalization stocks which represent 80% of the MSCI Israel index. Those five, in which Merrill anticipates the largest inflow of investment funds, are Teva, Israel Chemicals Ltd. (TASE: ICL), Check Point Software Technologies Ltd. (Nasdaq: CHKP), Bank Hapoalim (LSE: BKHD; TASE: POLI), and Bank Leumi (TASE: LUMI).
Haim Israel says that the upcoming elections will not affect the TASE, based on a statistical review of previous elections' impact on the stock market. The TASE will be affected, however, by the disappearance of investment by households this year. "Households will be pushed to the stock market by the zero real interest rate, but this won't happen during the coming year," he said.
He also claimed that operation Cast Lead did not impact negatively on the Tel Aviv Stock Exchange.
Merrill noted that while Israel faces an economic slowdown in the first half of the year, it is well-positioned to recover in the second half, thanks to action by the Bank of Israel. “We believe the BoI has been one of the most proactive central banks in the world with aggressive rate cuts and targeted monetary policy responses so far,” said the analyst. “Together with the expected fiscal stimulus, its policy is expected to pay off in the second half of the year.”
Merrill says its bottom line for 2009 is that Israel's market fundamentals appear softer but still healthier than emerging market exchanges. Merrill estimates 2009 earnings per share growth for TASE companies at 7.8%, higher than emerging markets, with an estimated drop of 1.2%, or the emerging EMEA region, with 4.3% growth. This, coupled with a lower beta, no asset bubble and more monetary easing scope means Israel has the fundamentals to weather the global storm.
A deal in which Merrill Lynch was acquired by Bank of America closed on January 1, 2009.
Published by Globes [online], Israel business news - www.globes-online.com - on January 18, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009