Merrill Lynch analyst Haim Israel expects that Morgan Stanley will reclassify Israel as a developed market, from its current emerging market status, and include Israel in its list of Morgan Stanley Capital International (MSCI Barra) developed markets (DM). Israel is currently in the MSCI Emerging Market (EM) Index.
The analyst says that Morgan Stanley will then include Israel in three major international benchmark indices the widely-tracked MSCI EAFE (Europe, Australasia, Far East), the MSCI World Index (a developed markets index), and the Kokusai Index (developed markets ex-Japan).
When reviewing the issue, analysts have often expressed concern that Israel's relative weight in the developed market indices will be small, compared with its weighting in the emerging market index. Haim Israel says that the Tel Aviv Stock Exchange's (TASE) outperformance this year slightly reduced the difference, and that the TASE will be a net gainer in any case.
The pro-forma weight of Israel in the MSCI World index is 0.39%, versus 2.87% in MSCI EM index currently. The analyst points out, "While Israel would obviously not be one of the larger countries in the DM indices, it neither would be a notable laggard; based on Bank of America/Merrill Lynch estimates, Israel would rank 18th out of the 24 DM member countries, with similar weightings to Denmark and Belgium and larger weightings than Portugal, Ireland, Greece, New Zealand and Norway.
Israel’s relative position has improved somewhat compared with the weightings Merrill Lynch calculated in January, as Israel has outperformed DM, but underperformed EM, in 2009. Since January, Israel's weight increased in a DM portfolio (0.34% in January, to 0.39%), while it declined in EM (3.17% to 2.87%).
Israel looks primarily at the passive investment industry, where investment managers track specific indices or benchmarks. In the active investment management industry, where fund managers have discretion about specific investments, Israeli shares may be overlooked due to their minute weighting. But just from managers tracking the three new indices Israel is expected to join, net new inflows can reach $2.81 billion. This includes about $4.1 billion in new inflows, with EAFE funds being the largest, and $1.29 billion in outflows as Emerging Markets fund managers sell their holdings.
The analyst expects that most of the new funds will be invested in Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) ($1.68 billion), Israel Chemicals Ltd. (TASE: ICL) ($227 million), Check Point Software Technologies Ltd. (Nasdaq: CHKP) ($162 million). Those three companies account for about 74% of the MSCI Israel Index, leaving less than $800 million in net inflows into other Israeli shares, mostly on the TASE.
The overall positive effect of the new inflows may take a while to be felt, since Emerging Markets fund managers will sell very quickly, but Developed Markets fund managers will build their positions over time, so that the short term effect may be negative.
Merrill Lynch was bought by Bank of America in 2008 and is now a wholly-owned subsidiary of the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on June 15, 2009
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