"The Tel Aviv Stock Exchange (TASE) is one of the world's ten cheapest markets. In 2011, in line with the global trend, the Israeli market fell. But internal and external forces last year resulted in only a partial correction in Israel, while all other markets enjoyed rising prices. Distortions tend to be closed, so I believe that we'll ultimately close the gap," says UBS Wealth Management Israel Ltd. chief investment officer Kobi Feller.
Feller joined UBS Israel two years ago to set up the branch's wealth management unit. He says that the decision to establish the activity was made after UBS AG (NYSE; SWX: UBS) designated Israel as a strategic target. "The bank carried out a thorough study, which included the amount of the public's assets and the accumulation of new wealth. When it was completed, the bank marked Israel, Brazil, and Mexico as the three markets with the greatest potential."
Surprisingly, while many sources in the Israeli market believe that Israel suffers from over-regulation, UBS says that this is an advantage. "Like other foreign investors, UBS seeks the certainty that regulation creates. The bank operates according to meticulous standards and rules, and from this perspective, regulation is an advantage. The more a market is supervised and controlled, the easier it is for the bank to operate in it," says Feller.
Feller says that one of the factors which adversely affected the TASE was Israel's switch from the MSCI emerging markets index to the developed markets index in late 2010. "Were Israel still included in the emerging markets index, the TASE would be 10% higher," he says. "The reclassification as a developed market slowed the rate of rises, which had been strong until then."
Feller is nonetheless optimistic, and explains why the TASE is attractive. "It should be remembered that in addition to being inexpensive, the TASE offers sector diversity. In my opinion, the Tel Aviv 25 Index does not necessarily represent the capital market's performance, because there is a big difference between it and the Tel Aviv 75 Index and the Mid-Cap Index. This is because of the composition of the Tel Aviv 25 Index, in which specific shares affect the whole index. The other shares are still traded cheaply."
Feller says that when institutional investors finish the process of allocation between Israel and other markets, we will begin to see an improvement. He also believes that after the uncertainty over the budget clears, we will see investors prepared to increase their exposure to the TASE. Until then, UBS prefers stock picking over investment in sectors, and its recommendation include Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ), Delek Group Ltd. (TASE: DLEKG), and Ratio Oil Exploration (1992) LP (TASE:RATI.L). Feller's preferred index is the Tel Aviv 75 Index.
The general direction is positive
Feller is also optimistic about foreign markets. "The main questions that a global investor should ask are whether global growth is recovering, and whether the growth will continue in the coming years. Since the answer is positive, it is necessary to examine investments with a cyclical perspective, which means increasing exposure to stocks and corporate bonds," he says.
Feller says that global growth will result in investors switching from deposits to higher risk products. "The general direction is positive, but there are pockets of uncertainty on the way. Although some of it has been lifted, at the same time, the market has translated this to gains. In any event the general directly of the economy should be looked at, and it is good. Happily, investors have learned the lesson of 2008 and there are no heavy sell-offs now."
UBS still recommends exposure to the US, with an "Overweight" recommendation for the technology and manufacturing sectors. "In the medium term, we recommend mining companies, which are expected to show the biggest improvement," says Feller.
Feller also sees potential in emerging markets, such as China, Brazil, Russia, and South Korea.
In view of the growing tendency by Israeli investment institutions, especially in last two years, to increase their foreign exposure in investment portfolios, Feller says that the investment strategy of UBS Wealth Management Israel was built to offer customers a comprehensive picture of their shekel and foreign investments through a single contact person.
The recommended investment portfolio for a new UBS customer includes high foreign exposure - 50% of the equities component and 30% of the fixed-income component. Feller says that this "raises the need to offer a holistic solution." He adds that the diverting of money overseas will continue, but that the TASE will continue to win a substantial share of investment portfolios.
In conclusion, with all due respect to Swiss standards and expertise in overseas markets, it is hard not to wonder what is the added value of a foreign wealth management firm compared with Israeli firms. "First of all, in contrast to other firms operating here, we have no conflict of interests. We do not manage mutual funds, we have no provident funds or nostro, so we are free to invest in any security we want," says Feller.
"Secondly, our team of eight people consists of Israelis, who have been chosen carefully, so in addition to understanding the global market, we definitely have something to offer in terms of the local market."
Published by Globes [online], Israel business news - www.globes-online.com - on February 25, 2013
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