In the past few days, since Bank Hapoalim CEO Dov Kotler and Israel Discount Bank CEO Uri Levin expressed concern that the government’s planned reforms of Israel’s judicial system could have a negative effect on the economy, bank stocks have been a focus of attention on the capital market. The banking sector led the falls on the Tel Aviv Stock Exchange (TASE) on Sunday, but also stood out positively on Monday, when the market bounced back somewhat.
The reason for that is that the banks reflect the local economy, for better and for worse, and they also represent the most liquid sector on the TASE. TASE figures now show that the five largest banks saw high trading volumes in 2022, even before the current storminess. This was partly because of their growing profitability, as interest rates rose, starting from April 2022.
Daily turnover in bank stocks last year averaged NIS 365 million, almost a quarter of total turnover on the TASE. The figure is 31% higher than in 2021.
At the same time, the problem of liquidity and tradability on the TASE has taken a turn for the worse. The stocks on the leading trade indices, headed by the Tel Aviv 35 Index of the stocks with the highest market caps, are taking a larger and larger slice of daily trading, after two years of decline.
The proportion of total trading accounted for by the Tel Aviv 35 stocks rose from 55% in 2021 to 64% in 2022, after gradually falling in the period 2018-2021. The concentration of trading in the Tel Aviv 35 stocks is still lower than it was in 2018, when the proportion was 76%, but the strengthening trend is heading back towards that level.
This is because the index is mostly made up of stocks of companies that benefit from current macro-economic conditions, such as the financial sector, which gains from rising interest rates, and oil and gas companies, which are gaining from world energy prices, while it contains few growth companies, which suffer from higher interest rates.
At the same time as concentration of trading in the Tel Aviv 35 Index stocks rose, the proportion of turnover accounted for by stocks on the Tel Aviv 90 list (which are also on the Tel Aviv 125 list) fell from 30% in 2021 to 28% in 2022.
"The Tel Aviv 90 Index is pretty much a dead index at present," a capital market source said. "It contains many stocks of growth companies that in recent years benefitted from low interest rates. Since the central banks started raising their rates, they have become uninteresting," he explained.
It should be mentioned that alongside the growth companies that have been hit, there are several companies on the Tel Aviv 90 list with decent turnover in their stocks, such as supermarket chain Shufersal, which saw average daily turnover rise 33% to NIS 19.6 million, because of the control battle in the past year, and despite it being relegated from the Tel Aviv 35 list last August. Enlight Energy, which will enter the Tel Aviv 35 list this month, Bazan (Oil Refineries), Maytronics, Fox, and Issta are other examples.
"The smaller indices are almost completely moribund," the market source added. Indeed, while the stocks on the Tel Aviv 125 list accounted for 92.5% of trading on the TASE last year, trading in stocks on the SME 60 list (which consists of the 60 companies with the highest market cap among those not on the Tel Aviv 125 list) fell from 5.6% of total turnover to 3.2%. "These companies have no liquidity. This trend was highlighted when there were large redemptions from the mutual funds in the past few months, and the funds did not manage to offload the merchandise," the source said.
Liquidity problem depressing new issues
Average daily turnover in equities on the TASE, excluding ETFs and off-floor transactions, was NIS 1.6 billion last year, almost 20% higher than in 2021. Total turnover and conversions, including ETFs and off-floor transactions, averaged NIS 2.3 billion daily, 22% more than in 2021. Turnover in January this year was 15% lower than in December.
Companies not on the leading indices (and there are more than 400 of them after the wave of IPOs in 2020-2021) have not benefitted from the rise in turnover. Their market caps have suffered as a result, and they have not gained from exposure to new investors.
Executives from the underwriting market told "Globes" in December that the lack of tradability was having a big effect on new issues. "The chance of accession to the indices is critical when an IPO is planned. If I come to the institutions and tell them that I have a small company that I want to float, they’ll say ‘Forget it, we’re not putting our marginal shekel there,’" one underwriter said.
He said that the reason for the fall in tradability of second and third tier companies lay in the shrinking number of market players, after a series of mergers and acquisitions among investment houses. He explained that the fact that the institutional market had become more concentrated was leading to the institutions, because of the huge amount of assets they had under management, preferring to invest only in big, highly tradable companies, and avoiding the smaller ones.
The TASE is of course aware of the problem. Last year, in order to boost tradability and liquidity, it presented a comprehensive reform of the indices that is due to come into effect in the second half of 2023. In another measure, in March last year, it considerably reduced the minimum size of a buy or sell order, to NIS 500.
Leumi and Hapoalim lead again
As in previous years, Bank Leumi and Bank Hapoalim topped the trading turnover table on the TASE last year. Average daily turnover in shares of Bank Leumi, which heads the list, rose 29% in comparison with 2021, to NIS 111 million. This is the highest figure for a single stock since Teva in 2015, when turnover in the stock averaged NIS 114 million daily. Last year, Teva was in fifth place, after a 43% rise in turnover in comparison with 2021, to NIS 60 million daily.
Bank Hapoalim was in second place last year (NIS 100 million), and two other banks are among the most traded stocks: Israel Discount Bank (4th place, NIS 67 million) and Mizrahi Tefahot Bank (8th place, NIS 54 million). The number of transactions in bank stocks shot up by 75% in 2022 in comparison with 2021.
Published by Globes, Israel business news - en.globes.co.il - on February 1, 2023.
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