More On The Israeli Stock Market: Record Highs.....But A Market in Crisis ?

Despite reaching a new all time high, the Israeli stock market continues to have the issues described in my previous post on the subject.

The English Haaretz in a translation of an article in its partner Hebrew business newspaper the Marker noted the following with regard to the record high. Israeli stock market.

Five reasons Israeli stocks have surged to record highs

With bond yields tiny, global stock markets climbing and the Israeli economy solid, why wouldn’t shares shine?

1. Zero interest rates for bonds

2. Stock indexes don’t necessarily overlap with economic glitches:

Many companies on the TA-25 are tied to events in overseas markets, not in Israel. For example, the biggest gainer so far this year is drug and diagnostics firm Opko Health. The stock, a very volatile one, has surged 71% this year.....

As far as the companies I labelled "pure Israeli companies":

Shares with a closer link to the local economy — such as those for banks, food makers, retailers, supermarket chains and communications companies — have risen much more moderately this year.

The TA-75 index, probably a better representative of the Israeli economy, has risen only 8% this year, half the TA-25’s performance. In fact, over the past 12 months, the TA-75 is down 4%.

Some stocks have been gradually slipping in tandem with their companies’  profits, such as Israel’s largest supermarket chain Super-Sol, cellular providers Cellcom Israel and Partner Communications, and Alon Blue Square, which owns Israel’s second largest supermarket chain, Mega

3. The economy is solid

4. Investors smile on right-wing governments

5. Records on global stock markets

The Tel Aviv Stock Exchange is always influenced by what happens elsewhere around the world, and elsewhere around the world most stock markets are near record highs, or at least are rising nicely.

An article in the Hebrew the Marker pointed out that the record high was not much of a headline or a subject of conversation and in fact the Tel Aviv stock exchange is in a crisis. one that intensifies each years and shows no sign of reversing

Some of the reasons cited 

Despite the growth of pension money it will be difficult to invest the money estimated at NIS 70 billion (approximately 18 billion) each year from new contributions and maturing bonds. Interestingly the estimate is that the allocation is as follows 60% Israeli govt bonds 15% outside of outside of Israel and 35% in corporate bonds or stocks of Israeli companies. Interestingly this means out of the funds not invested in govt bonds 42% is outside Israel.

But the article notes it will be very difficult to invest that pension money because of the poor liquidity and lack of new issues on the Tel Aviv Market.

Reasons cited for the crisis in the Israeli market are noted below, All of these problems form a vicious cycle the more they accelerate the worse they get and each one is related to the other.

• Complex regulations

• Low Level of activity. While it may sound counterintuitive to some all markets need a significant number of short term traders to provide liquidity and thus ease of execution by long and short term participants. The decline in volume from domestic speculators is related to the boom in speculative activity in real estate.

There also has been a massive decline in institutional investors from abroad since 2009. At that time MSCI moved Israel from the emerging to developed markets indices which significant reduced the value of Israeli stocks present in global indices. This means both index instruments and investors benchmarked against an index would have less demand for Israeli stocks .From a Bloomberg article in 2013

Three years later, the reclassification is looking like a disaster. Before 2010, Israel accounted for 2.7 percent of the now $7 trillion MSCI Emerging Markets Index, giving it an outsized share of investor money allocated toward developing economies. Now, it makes up just 0.2 percent of the MSCI World Index, which has a cumulative market value of more than $33 trillion, according to data compiled by Bloomberg.

The change has forced Israeli companies to compete with those from the U.S., Europe, and Japan for fund managers’ attention and money. Since 2010, trading volume on the TASE is down about 45 percent. Initial public offerings have dried up, and big companies are choosing to delist or list elsewhere. “We went from a significant place in a market we wanted to move from to no-man’s land,”

Israeli companies want to raise money abroad: The small size of the market and lack of liquidity make the Israeli market less attractive to investors. As a consequence it is an unattractive market to raise capital. Israeli companies choose to go public in the large liquid markets in the US. The large multinational corporations most attractive to investors large and small are on the US exchange. This leaves the Tel Aviv market to what I call purely local Israeli companies such as local retail chains which are tiny in size and capitalization and unable to raise capital on the global equity market.

• The trend of larger companies looking outside of Israel continues to intensify :67% of Israeli  companies raising capital between 2012 to 2014 (23 in total)did so outside of Israel raising   NIS 9 billion ($2.37 billion) while  the 5 companies raising funds inside Israel  companies raised  raised NIS  1.4 billion ($367 million)

Left chart number of companies issuing on Israeli capital markets (blue stocks grey bonds) center chart % if companies issuing securities outside Israel (gold) inside Israel (blue) right chart number of companies trading on Israeli market

The article's analysis doesn't see any reasons the above trends will reverse if anything they will likely grow. With the pension funds of Israelis constrained to invest in Israeli corporate bonds and stocks despite the problems described above, individual investors might be advised to review market conditions before deciding to add their non pension money to this market