There has been exceptional and unprecedented activity by foreign investors in Israel's financial markets in recent months. Data from the Bank of Israel about the extent and nature of their activities on Israel's capital markets point to lively speculation on their part, clearly exploiting foreign currency market conditions, and interest rates set by Governor of the Bank of Israel Prof. Stanley Fischer.
Economists at the Bank Leumi (TASE: LUMI) economics division noted the moves, and in their latest weekly survey they presented worrying statistics: In the period January to June this year, foreign investors invested about $4.5 billion in negotiable securities. Looking just at January-April (in May and June there were net sales), acquisitions of securities by foreign investors reached $6 billion - more than the totals of 2007, 2008, and 2009 combined.
These massive purchases were focused specifically on Treasury bills issued by the Bank of Israel. The volume of Treasury bills bought by foreign investors is unprecedented by any measure. It rose from 1.5% in January 2009 to 10% in January 2010, and to 22% by May. In absolute figures, the value of treasury bills held by foreign investors rose from NIS 1.1 billion at the beginning of 2009 to NIS 8.8 billion at the beginning of 2010, to NIS 24.5 billion by the middle of this year.
The bank's economics department weekly survey said, "Short-term capital movements reflect investors' desire to gain from the short term interest rate gaps between the US and Israel, and from the strength and relative stability of the shekel exchange rate."
The survey adds, "It is likely that this is a move that has speculative aspects, which is in contrast to capital movements in the past, which were more influenced by relatively stable long term considerations."
The second part of the explanation came on Monday, with the publication of foreign currency market details: The amount of swap trades, in which traders swap foreign currency interest rates for shekel interest rates, in order to gain from the differences between them and from the strength of the shekel - reached $59 billion in July, up from $57 billion in June.
The proportion of foreign investors in total trade (including swaps, conversions, and options) was 63% in July, similar to June's 62%, and higher than earlier months (about 57% in May, 58% in April). For comparison's sake, swap deals at the beginning of 2009 were $16 billion, and rose to $42 billion by the beginning of 2010.
So what exactly is going on here? Simply put, foreign investors are borrowing at interest rates of virtually zero in the US, converting the dollars into shekels, and buying Israeli short term debt carrying positive interest rates. In this way, they enjoy significant arbitrage gaps.
In principle, the move is one of the riskiest in the capital market. The main risk is a sharp devaluation of the local currency in terms of the dollar, which can burn up any profits and even cause heavy losses. This risk holds true for nearly every market except one - Israel's.
One doesn't need to be an especially sophisticated investor to understand that the Bank of Israel has been keeping the dollar exchange rate around NIS 3.75-3.8 for the past year at least, by its unlimited dollar purchases on the market. Foreign speculators realized this a long time ago, and Fischer's dollar purchases generally guarantee foreigners a stable shekel-dollar rate when they exit.
Fischer's policy of intervention in the foreign currency market and his attempt to keep the shekel stable against the dollar takes away the risk inherent in the speculative trades that foreign investors have been conducting on Israel's foreign currency market in recent months. Somebody at the Bank of Israel should wake up and understand that foreign investors' speculative holdings are too high, and can therefore roil the market.
Every tremor, whether economic (global or local) or geo-political, is liable to cause foreign investors to throw all those investments back into the market, which can have negative repercussions, to say the least.
Even more, a tremor does not have to be in Israel's economy, but can break out even in another economy included in the portfolios of investors active in Israel, like those of eastern Europe or South Africa, because then investors will need the liquidity that only short tem debt, like treasury bills, can provide.
Someone ought to wake up, and at least put all the cards on the table.
Published by Globes [online], Israel business news - www.globes-online.com - on August 11, 2010
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