The lifeblood of every stock market is the public offerings - IPOs of new companies and secondary offerings of growing companies. This was once the case with the Tel Aviv Stock Exchange (TASE). In the past companies like Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) and Israel Chemicals Ltd. (TASE: ICL) created a situation in which all investors profited. There were years in which all those who held shares of this kind profited in the long term even if they did not buy them with the most perfect timing.
It's all very simple. Stock markets that have a large number of growing companies allow all investors and traders to profit. That's because the proliferation of flourishing companies creates on the market a trend which feeds itself. Growing companies consistently cause the index to rise, which attracts more traders and investors, which increases the volume of activities and the depth of the market, and makes it attractive for more new offerings, and so on.
The TASE's problem is that this dynamic, vital for the existence of any stock exchange, has been reversed. For a protracted period of time "Ahad Ha'am Street" has been suffering from a negative dynamic which feeds itself.
The continued stagnation of the TASE and the shrinking trading volumes rightly concern those operating on the capital market, and the natural tendency of economists is to attempt to break the negative dynamics, which is self-perpetuating, through incentives. Consequently, concern over the situation on the TASE has gotten translated into proposals that will facilitate a recovery. These include suggestions to reduce regulation, expand the days the TASE is open and its hours of activity and reduce taxation on capital gains etc.
But let's remind ourselves that over the past decade hoisting the market through incentives does more damage than good. Take for example the lowering of interest rates after 9/11 in order to encourage private consumption in the US created a credit real estate bubble, which burst with a huge explosion that resonates in the market even today.
Therefore, before thinking about artificial incentives, it is worthwhile clarifying what is the fundamental problem on the TASE and dealing with that. The fundamental problem is the absence of growing companies.
This negative trend did not begin yesterday. For many years now there have not be growing companies on the TASE. Long before the tightening up of regulations, Check Point Software Technologies Ltd. (Nasdaq: CHKP), Amdocs Ltd. (NYSE: DOX) and Comverse Technology Inc. (Nasdaq: CMVT) listed overseas, while Iscar Ltd. passed into private foreign hands. Recent nearly $1 billion acquisitions of Waze Ltd. and Trusteer by Google and IBM took place without taking the route of creating value that runs through Ahad Ha'am Street.
Waze and Trusteer are not the only examples. In the past two years alone, nine Israeli technology companies were sold each for more than $400 million, for a total sum of $4.5 billion. In every instance, investors and those companies invested in on the TASE were not part of the celebrations.
In order to increase its attractiveness, the TASE does not need more trading days in which the public can exchange views on banks stocks or the shares of Israel Chemicals and Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ).
In order to revive the positive dynamic, the TASE needs to find a way to connect the public at large to the sources creating Israel's new value. To connect the public to companies and the activities in which they have a relative advantage in the domestic economy.
If the TASE is to succeed in reinventing itself perhaps it should find a way of allowing the public at large to be a partner in and enjoy the value being created by the next Waze.
The author has a Ph.D. in Economics.
Published by Globes [online], Israel business news - www.globes-online.com - on September 17, 2013
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