In about a month's time, in mid-February, the Israeli capital market could receive a significant push, leading to billions of dollars flowing into it. International indices company MSCI will publish its decision on whether to include Israel in its leading European stock indices. The decision will be made after a survey among leading asset managers and other interested parties in the global market.
The last time MSCI published a decision about Israel cost many companies and investors in the local capital market a great deal of money. In May 2010, the company reclassified from a developing market to a developed market (following Israel's accession to the OECD). That substantially reduced Israel's weighting in the relevant indices, as it went from top of the league of developing countries to bottom of the league of developed ones.
"That was one of the worst days in the history of the Israeli capital market," recalls Adv. Offir Eyal, director of International Affairs and Business Development at the Israel Securities Authority. But that was not the only blow that that decision inflicted on the Israeli market. "Strangely, and unusually, Israel was not added to any of MSCI's regional indices, the only country not to be included in one of these indices. The result is that foreign investors who choose to invest in products in a regional index are not exposed to the Israeli market, which has not benefitted from the potential demand.
"The MSCI Europe Index, for example, has investment products to the tune of some $170 billion that track it, and Israel's weighting, if it is added, will be between 1% and 1.5%. That could have huge significance for the Israeli market," says Eyal.
Those directly affected will be the major Israeli companies that will join the index (such as the big banks, Azrieli Group, ICL, Teva, Nice Systems, Elbit Systems). In addition, another 100 or so Israeli companies will benefit from the move, since under the MSCI Europe Index are sub-indices, such as the MSCI Europe Transportation Index, the MSCI Europe Information Technology Index, and so on, through which additional Israeli companies could see demand for their stocks.
"Besides the passive products that track the indices, there are many active portfolio managers around the world who declare that they cannot invest in an Israeli company because their investment policy limits them to countries on the MSCI Europe Index. In talks with global market players, I often ask what is the one thing I could deal with that would affect their exposure to the Israeli capital market, and they reply that it's the matter of Israel's classification in the major indices. This is a game changer, and if it happens, it will be amazing news for the Israeli market, a correction of what happened in 2010, and the return of those investors that we want to have here: big, and sophisticated," says Eyal.
It's important to point out that this is not the first time Israel has tried to change MSCI's decision. There were two attempts in the past that MSCI rejected outright, so the question arises, why should the result be different this time?
"The timing of the move is very good from the point of view of the Israeli capital market," says Adv. Ron Klein, director of the Israel Securities Authority Markets Development Division, one of the two units that report to Eyal. "We have explained to the asset owners and to MSCI that Israel is already categorized as belonging to Europe by many organizations, such as the International Monetary Fund, the International Organization of Securities Commissions, organizations that combat money laundering, and others.
"Apart from that, as far as main economic indicators are concerned (GDP, unemployment, and so on) Israel ranks alongside the higher placed countries in Europe, and its accession to the MSCI Europe Index will lead not only to European exposure to the strong shekel, but also to diversification of investment in the Europe Index, particularly in exposure to technology stocks.
"The technology sector currently accounts for just 8% of the index, whereas in the Israeli index compiled in accordance with MSCI criteria it represents 37%, and so including Israel will enable the Europe Index to strengthen considerably in the area of technology. In addition, looking to the future, the Europe Index will be able to gain exposure to Israeli unicorns, which represent 8% of the technology unicorns in the world," Adv. Klein explains.
Published by Globes, Israel business news - en.globes.co.il - on January 16, 2022.
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