Since the start of the Covid-19 crisis the Tel Aviv Stock Exchange (TASE) has struggled while the main indices on the Wall Street stock exchange in the US have reached new records. While the S&P 500 Index, which measures the performance of the 500 largest companies on the various New York stock exchanges, fell 20% in the first few weeks of the crisis, it rapidly recovered and has since climbed 50%.
But while Wall Street goes from strength to strength, the TASE has failed to recover from the early Covid-19 crisis declines. The Tel Aviv 35 Index, on which the 35 most valuable companies are listed, is down 15% since the start of the year and down 20% since it set a new record in February. Over the past 12 months the Tel Aviv 35 Index has also compared unfavorably with the S&P 500 Index. The former has risen 15.94% while the Tel Aviv 35 Index has fallen 9.38%.
Two factors explain this discrepancy. The lack of tech companies on the Tel Aviv 35 Index, and the failure of the Israeli government, focused more on coalition crises, to navigate the perilous waves of the virus and its economic fallout.
TASE dominated by traditional industries rather than tech
Wall Street investors have benefitted mainly from the sharp rise in the share price of the tech giants - the FAANG shares - Facebook, Amazon, Apple, Netflix and Google, as well as other tech majors like Microsoft. For its part the TASE is dominated by real estate, finance and energy companies, which have all underperformed.
In addition to the different composition of the types of companies in the market, the US administration has been much more aggressive than the Israeli government in encouraging economic activity. President Trump's administration has injected trillions of dollars into buying assets through the US Federal Reserve, which has helped soothe investors' concerns about the liquidity crisis weighing significantly on the markets, and supported the positive rises that followed.
IBI investment house chief economist Rafael Gozlan said, "The underperformance of the TASE compared with the US is very logical and stems from the sectors that have been outstandingly poor during the crisis such as the banks, which have performed more or less the same as the shares of the banks in the US and Europe, as well as real estate and energy. We might be the startup nation but this does not receive enough expression on the TASE and indices without major weight of tech shares are performing less well in this crisis."
IBI's figures help demonstrate the dominance of tech shares on the S&P 500, which make up nearly 25% of the overall US indices compared with 18% at the time of the dot.com bubble in 2000.
Gozlan added, "Technology is perceived as the big winner from the crisis and the share of companies in the crisis on the index is the substantial part of the explanation about the point where the index is, which is very focused on technology."
"You can see the massive entrance of money from the public into tech shares, and that explains the momentum, although from a long term perspective it will be difficult to justify their value at the high multiples at which they are currently trading."
We are in a world with a lot of liquidity pushed by the central banks including the US Fed, which gives a feeling that if the situation worsens, it will intervene on the market, and this gives investors the feeling that it will continue to support them until the end of the crisis."
Is the role of the Israeli government part of the underperformance of the TASE?
The fact that the Israeli government is not functioning well in the healthcare and economic realm is a substantial part of the lagging behind of the TASE. The fact that we have not coped well with the infection rate and have a powerful second wave has led to damage because of the role of the failed government. There is problematic management of the crisis in terms of healthcare and economically. If we didn't have this second wave then we would have seen a more significant recovery of the real economy and then the damage regarding financial companies, with the amount of money set aside by the banks, and the damage to the commercial real estate companies which are related to the worsening situation, would have been reduced."
Gozlan adds that with new elections looming and the failure of the government to present economic and health plans to tackle the crisis have all contributed to the problem.
Looking ahead, investors in Israel can perhaps take comfort from the latest update earlier this month of the Tel Aviv 35 Index, which included a 'mini revolution' on the Tel Aviv 35 Index with six new companies coming in, five of them for the first time. All six companies are in the tech sector Opko, Energix Renewable Energies Ltd. (ENRG), Maytronics Ltd. (TASE:MTRN), Matrix IT Ltd. (TASE:MTRX), Nova and Sapiens, reflecting changing investor preference during the Covid-19 crisis. They span a wide area of tech sectors from life sciences and cleantech, to IT, electronics, optics and semiconductors.
Three of the six - Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI), Sapiens International NV (Nasdaq: SPNS; TASE: SPNS) and Opko Health Inc. (NYSE: OPK; TASE: OPK) are dual listed on US stock markets are a riding the positive wave there. They have created opportunities from the crisis in their different ways with Opko developing Covid-19 tests in its laboratories, Maytronics benefitting from greater use of private swimming pools and Energix taking advantage of the growing appetite for green energy.
But it should still be noted that the most valuable Israeli companies on Wall Street have for whatever reason declined to dual list on the TASE. These include Check Point Software Technologies Ltd. (Nasdaq: CHKP), Wix.com Ltd. (Nasdaq: WIX), Amdocs Ltd. (NYSE: DOX), SolarEdge Technologies (Nasdaq: SEDG), CyberArk Software Inc.(Nasdaq:CYBR), and most recently Fiverr International (NYSE: FVRR) and Lemonade (NYSE: LMND).
At the same time the six Israeli companies that were relegated from the Tel Aviv 35 Index are all in badly hit traditional industries including hotels (Fattal Holdings 1998), and energy (Delek Group and Delek Drilling), and real estate (Big).
Will the Tel Aviv 35 Index update help?
Gozlan said, "On the assumption that the shares joining the leading indices will continue to perform well, then for sure. However, you must remember that those shares that reached the leading indices did so after making major progress through which their value rose. Looking ahead, we see that the progress of the tech sector in the world very much depends on the continued 'hype' and entry of more public money, which is difficult to justify in terms of their pricing in the net economy."
Published by Globes, Israel business news - en.globes.co.il - on August 20, 2020 © Copyright of Globes Publisher Itonut (1983) Ltd. 2020