The Tel Aviv Stock Exchange (TASE) is at a crossroads, a little more than a month before it is upgraded by MSCI to developed markets status. As the Tel Aviv 25 Index has risen to an all-time high, things are not calm behind the scenes. Foreign investors are preparing for the upgrade by selling "huge quantities" of shares, in the words of a top market player, who is close to foreign investors, and who asked to remain anonymous.
"Nine of every ten transactions by foreign investors in the past 2-3 months are sales," the source told "Globes". "We're talking about huge quantities of sales. Let's admit it: at the current multiples, the market is not a 'strong buy' recommendation. There's nothing to go crazy over, and the foreigners know it."
Sources believe that foreign investors are responsible for a third of TASE's daily trading volume. The main worry is about the consequences of the TASE's reduced weight following the upgrade, from 2.87% in the MSCI emerging market index to 0.39% in the MSCI developed market index.
Market sources have long warned of an exodus by foreign investors from the TASE and subsequent delays by new investors not rushing to get in after the upgrade on May 26.
"Globes": Why is the market still rising if foreign investors are selling?
The source: "Local investors are buying. Foreign investors are selling huge quantities and the public is buying, but this can't go on, and at some point it will come crashing down. Everyone in the market knows this and they're talking about it behind the scenes, but they're keeping quiet outside."
Evidence of the Israeli public's rush to the TASE is seen in net investment in equity mutual funds. According to Meitav Investment House Ltd., equity mutual funds raised a net NIS 800 million in the first quarter of 2010, 100% more than in the fourth quarter of 2009, while corporate debt funds raised a net NIS 8.6 billion, 53% more than in the preceding quarter.
Are investors in developed markets worried about Israel's geopolitical situation?
"Absolutely. They're worried about the security situation, in contrast to Israelis. Israelis say, "If Israel Electric Corporation (IEC) (TASE: ELEC.B22) falls, the country will fall, so I'll buy IEC bonds because they're safe'. Foreign investors don’t think like that, because they don’t live here. In other words, Israelis don’t price geopolitical risk in the market, whereas foreigners do."
What will happen after May 26?
"In my opinion, foreign activity in TASE trading will fall in May-June, and July-August will be dead."
And in the longer term?
"You'll have to educate investors about the new world, teach them about Israel, hold conferences, and invest a lot of effort. It will take time, but it will happen. I believe that the reeducation process will take 9-12 months. In the long term, the upgrade will benefit the TASE, boost turnover, and bring new players into the market."
Published by Globes [online], Israel business news - www.globes-online.com - on April 15, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010