Israel Market Status Shows Be Careful for What Is Wished

Israel won the approval of the world’s arbiter for global stock markets three years ago, when MSCI Inc. promoted the country to the ranks of developed nations from emerging. Instead of a blessing, it’s turned into a curse.

As part of the MSCI Emerging Markets Index, Israel had a weighting of 2.7 percent, the 11th highest and an outsized proportion for investors focused on developing economies. Now it makes up 0.2 percent of the MSCI World Index of 33 developed nations, forcing Israeli companies to compete with those from the U.S., Europe and Japan for fund managers’ attention.

While Israel has more startups per capita than any country and the benchmark TA-25 Index delivered the developed world’s second-best risk-adjusted returns, at the Tel-Aviv Stock Exchange, top officers have resigned, trading is down 44 percent since MSCI’s endorsement and big companies are leaving. The chief executive officer of one of those, Mellanox Technologies Ltd., says the exchange may need to be sold.

“We went from a significant place in a market we wanted to move from to no-man’s land,” Daniel Goldstein, the global head of sales at IBI-Israel Brokerage and Investments Ltd., which manages more than 27 billion shekels ($7.6 billion), said on July 28 by phone from Tel Aviv. “There are lots of interesting things happening here, but this is not necessarily reflected on the TA-25 index. There is nothing high-tech.”


Israel’s TA-25 Index rose 8.6 percent since the MSCI reclassification took effect in May 2010 versus a 67 percent jump for the Nasdaq Composite Index. That year alone, investors pulled $795 million from the Israeli market. The 44 percent tumble in volumes through the end of 2012 compared with an average 18 percent global decline, the Bank of Israel said in a March 12 report.

Initial public offerings have dried up. In June, Kadimastem Ltd., a developer of stem cell therapies, became the first company to list on the Tel Aviv bourse since the end of 2011, compared with a record 56 IPOs in 2007, exchange data show.

Companies that pulled off the exchange, which had 549 stocks in 2012, included Hot Telecommunication System Ltd., a telecommunications company, and ELAD Canada Inc., a real estate company owned by billionaire Isaac Tshuva. Israel Chemicals Ltd., the Tel Aviv-based company that extracts minerals from the Dead Sea to make fertilizers and potash, said yesterday it’s preparing for a dual listing in part to shield itself from worsening conditions on the local bourse.

‘Wake-Up Call’

The drop in volumes prompted a feud between regulators and exchange officials over who was to blame. Former Tel Aviv Stock Exchange Chief Executive Officer Ester Levanon resigned on July 17 and Saul Bronfeld, the chairman since 2006, followed the next week. Bronfeld, a former Bank of Israel chief economist, cited government regulations and slower economic growth for the exodus of investors and companies. Israel Securities Authority Chairman Shmuel Hauser says the bourse’s management is also responsible.

“The decline in volume and prices on the Tel Aviv bourse is due to excessive regulation and the change in the pace of economic growth, not the operations of the bourse,” Bronfeld said in an interview Aug. 5 in Tel Aviv. “My resignation is a wake-up call for Jerusalem,” where Prime Minister Benjamin Netanyahu’s government is based, he said.

The resignations are coinciding with a shuffle at the central bank, where two candidates nominated by Netanyahu to replace former Governor Stanley Fischer have withdrawn. Jacob Frenkel, a former central bank chief, and Leonardo Leiderman, the chief economist at Bank Hapoalim Ltd., dealt a blow to Netanyahu by giving up their nominations. Fischer’s handpicked deputy, Karnit Flug, is acting as a caretaker in the meantime.

More Sanguine

Israel’s outlook was more sanguine four years ago. The nation’s economy recovered from the 2008 crisis faster than most advanced nations with gross domestic product expanding by 14.7 percent between 2009 and 2012, compared with 3.2 percent growth in the U.S. and a contraction of 1.5 percent in the euro region.

In 2009, investors bought a net $1.7 billion of shares and the TA-25 Index soared 75 percent, the most in at least 16 years and the fourth-best performance among benchmark indexes tracked by Bloomberg in Europe and Africa.

The benchmark TA-25 Index has produced the second-best risk-adjusted returns among developed stock benchmarks after Australia’s S&P/ASX 200 Index in the past decade, helped by a technology-driven economy that has attracted global leaders in the industry.

Google Buys

Google Inc., the world’s biggest search engine, said on June 11 that it’s acquiring Israeli map-software provider Waze Inc. after international investors including Warren Buffett bought local companies.

“Israel has been a center of innovation for the better part of its existence and you see that today,” Zach Herzog, the head of international sales at Psagot Investment House Ltd. in Tel Aviv, said in a phone interview on Aug. 2. “Any high-tech company in the world like Google, like Intel Corp., like Microsoft Corp., Motorola Solutions Inc., they all have research and development centers in Israel.”

Mellanox, which listed in Tel Aviv in July 2007 and makes equipment that speeds up electronic data transfers, said it was following competitors when it decided to pull its shares as of Sept. 1. The Yokneam Elit-based company trades on the Nasdaq Stock Market in New York, as well as in Germany.

More companies from Israel trade in the U.S. than from any foreign country except China. Wixpress Ltd., an Internet company based in Tel Aviv, filed a draft registration in the U.S. in June for a possible share sale, while Alcobra Ltd., a Tel Aviv-based developer of a drug for treating attention deficit hyperactivity disorder, listed on Nasdaq in May.

Nasdaq Buyout

“There is no real business reason for Mellanox to stay and trade on the Tel Aviv Stock Exchange,” Chief Executive Officer Eyal Waldman said by phone from Tel Aviv on July 28. “One suggestion may be to sell the TASE to Nasdaq or the like.”

Robert Madden, a New York-based spokesman for Nasdaq, declined to comment by e-mail.

The TASE has memorandums of understanding with exchanges including Nasdaq and the London Stock Exchange Group Plc, an official of the Tel Aviv bourse, who asked not to be identified citing exchange policy, said by phone July 29. The TASE and Nasdaq agreed in 2007 to increase the number of companies listed in both the U.S. and Israel and boost trading. The exchange has signed similar agreements with NYSE Euronext and LSE.

‘Big Boys’

MSCI’s decision to label a country as developed takes into account gross national income per capita, which needs to be at least 25 percent above the World Bank’s high-income threshold for three consecutive years. The index provider also looks at liquidity and the accessibility of the country’s markets to foreign investment. Once a nation’s status is changed, investors tracking the MSCI index’s benchmarks have to rebalance their portfolios.

Levanon, who became CEO of the exchange in 2006, said in an interview three years later that winning MSCI’s approval was like breaking the glass ceiling for investment in Israel. “We’re playing with the big boys now,” she said after MSCI announced its decision.

Both Levanon and Bronfeld failed to update trading systems and products at the bourse and didn’t find solutions for the lower volumes, according to a copy of a letter sent by Hauser to the exchange last month. Sharona Mazalian, an ISA spokeswoman, declined to comment further. New management will “strengthen the bourse,” Hauser said July 25 in an e-mailed statement.

Hostile Control

Levanon resigned after failing to secure a position for Israel on MSCI’s Europe Index, which she said could have lured $2 billion to the country. Her attempts to attract technology listings to the exchange also fell short. Nice Systems Ltd., the Ra’Anana-based provider of analytical tools for recording service transactions, is the only technology company in the 25-member benchmark index.

“The advantages of a dual listing are no longer great, and it’s much more logical for us to be listed only on Nasdaq,” Nice Chief Executive Officer Zeevi Bregman said in an interview today with business daily Globes. However, “we are not considering leaving the TASE at the moment,” he said.

In her resignation letter, Levanon, 67, said “regretfully, I do not feel that I have determined support of the board in the plan” to increase liquidity and to improve trading. Levanon had no further comment beyond the letter, an official at the exchange said. Bronfeld, 71, said he was resigning because of “hostile” control by the regulator, which set up a panel to find ways to increase trading.

‘Very Simple’

“There is room to ease regulation,” Bronfeld said in the interview. “It’s the role of the finance minister to look into this question and discuss with companies, banks and investors what keeps them away from the Tel Aviv bourse. From there the road to repair the current situation will be very simple.” Finance Minister Yair Lapid declined to comment.

Government reforms in the telecommunications, banking, gas and chemicals industries are keeping foreign investors from buying shares in Israel, Gilad Alper, a senior analyst at Ramat Gan, Israel-based Excellence Nessuah Brokerage Ltd., said by phone on July 28.

After the government opened the telecommunications market to further competition in 2011, new entrants cut prices to attract customers. Shares of Israel’s largest telecommunications companies tumbled as much as 52 percent last year, making them the worst performers on the benchmark index.

“The main problem is regulation and state intervention into the affairs of companies, which has affected nearly all the companies on the TA-25 index,” Alper said.

Policy Review

Israel Chemicals’ shares have dropped 29 percent since the government set up a panel in June to review tax and royalty policies on natural resources. Bank Leumi Le-Israel Ltd., the nation’s second-largest lender, posted its first quarterly loss in four years at the end of 2012 and profit declined in the first quarter of 2013 at Bank Hapoalim, the biggest lender, as the central bank raised capital requirements.

For now, the exchange is searching for a new leader. The bourse named a search committee on July 29 to replace Levanon. Ron Malka, who is chairman of the panel, was named interim chairman of TASE on Aug. 1.

“The bourse cannot pull the carriage out of the mud alone, it needs help from the government,” Yaniv Pagot, chief strategist at Ramat Gan, Israel-based Ayalon Group Ltd. said by phone on July 28. “We need someone with a lot of vision and ability to implement. You need a team that can think differently.”

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