Top TASE index set for dramatic change in composition

Energix  / Photo: Company website
Energix / Photo: Company website

The underperforming Tel Aviv 35 Index will be reinvigorated in August when dynamic tech companies replace tired firms from traditional sectors.

The Tel Aviv 35 Index is set for a dramatic change in composition from the first Thursday in August, when the Tel Aviv Stock Exchange's (TASE) leading index will be adjusted to reflect the largest companies traded on the market.

Since the last such six-month update, the Covid-19 pandemic has taken its toll but the restructuring could reinvigorate the Tel Aviv 35 Index. If there are no major developments over the next few weeks, the changes will see a jump of nearly 50% in the number of tech companies traded on the Tel Aviv 35 Index - the sector that has led the rises on stock markets worldwide in the past few months.

This could be good news for TASE indices led by the Tel Aviv 35 Index, which have been underperforming in comparison with other stock markets around the world in recent years. This has been especially prominent this year with the Tel Aviv 35 Index down 16% since the start of 2020, while on Wall Street the Dow Jones has lost just 9%, and the S&P 500 is down 4%. In Germany the DAX is down 6% and in Japan the Nikkei is down less than 5%.

Banks, real estate and gas weigh on the Tel Aviv 35

The underperformance of the Tel Aviv 35 Index over the past six months stems mainly from its major bias towards banks, real estate and energy (gas and oil) - the sectors that have been hit hardest by the spread of Covid-19.

Due to the situation, with banks being required to set aside money for doubtful debts and interest rates remaining low for a long time to come, it will be difficult for them to increase profitability. The weakness of income producing real estate is clear with stores closed, consumers staying home and the few people going out in no rush to go to malls. Office leasing real estate companies are stymied by the shift to partial or full remote working from home.

In the energy sector, oil prices reacted swiftly with sharp falls due to plunging demand, and with a recession expected in the entire developed world gas prices are also falling, hitting Israeli energy companies.

The steep fall in the share prices in these sectors will likely see seven companies relegated from the Tel Aviv 35 Index (as of June 22). Four of them are in the energy sector: Delek Group Ltd. (TASE: DLEKG) and its energy exploration and production unit Delek Drilling LP (TASE: DEDR.L) as well as Energean Oil & Gas plc (LSE: ENOG; TASE: ENOG), which bought the rights to the Karish and Tanin fields, and Oil Refineries Ltd. (TASE:ORL). Its parent company Israel Corporation (TASE: ILCO) (not in the energy sector) will also drop out of the Tel Aviv 35 Index. Most of these companies have seen their share price fall by 50%-60% since the start of 2020.

The two other casualties will be hotel chain Fattal Holdings (1998) Ltd. (TASE: FTAL), which has seen its share price slump 65% because of the tourism crisis, and Gazit-Globe Ltd. ( TASE: GZT; TSX: GZT), which operates large shopping malls overseas.

The final decision on relegation from and promotion to the Tel Aviv 35 Index will be made according to the average share price in the first two weeks of July. The criteria for relegation is being outside the biggest 40 companies traded on the market according to market cap and at the moment the seven aforementioned companies fit that bill. An eighth company teetering on the brink is insurance company The Phoenix Holdings Ltd. (TASE: PHOE1;PHOE5).

The burden of the relegated - the profit of the promoted

When examining the list of candidate companies to enter the index, the picture shows companies that have benefitted from the coronavirus crisis. Six of the candidates for promotion come from the tech sector, which are reveling in all the factors weighing down the relegated companies. In some of these companies, employees work from home, and are not dependent on customers coming to them and actually profit from customers staying at home, using the Internet, seeing movies, buying online, working from home and storing everything in the cloud. And all that's without even taking a second wave of the virus into account.

Assuming there is no unexpected drama on the TASE in the next few weeks, these six new tech companies coming onto the Tel Aviv 35 index will be: Tech service and solutions company Matrix IT Ltd. (TASE:MTRX), whose share price is up 14% this year, and its sister company, insurance software firm Sapiens International NV (Nasdaq: SPNS; TASE: SPNS), whose share is up 30% in 2020. They will be joined by their parent company Formula Systems Ltd. (Nasdaq: FORTY; TASE: FORT) whose share is up 25% this year. Another tech company due for promotion is chipmaker Nova Measuring Instruments Ltd. (Nasdaq:NVMI; TASE:NVMI), whose share is up 22% in 2020.

Two other companies with a very good chance of entering the Tel Aviv 35 Index are Energix Renewable Energies Ltd. (ENRG) and Enlight Renewable Energy Solutions Ltd. (TASE:ENLT). Both companies are seen more as technology than energy and their share prices have risen 40% and 30% respectively. The seventh company set for promotion is Opko Health Inc. (NYSE: OPK; TASE: OPK), just six months after being relegated, mainly boosted by its connection to coronavirus testing.

If the Phoenix is relegated, then its likely replacement is veteran cancer immunotherapy developer Compugen Ltd. (Nasdaq: CGEN; TASE: CGEN).

50% rise in weight of tech companies on Tel Aviv 35 Index

The entry of at least six tech companies will more than double the number of tech companies traded on the Tel Aviv 35 Index. There are currently five tech companies on the index - NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE), Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT), Tower Semiconductor Ltd. (Nasdaq: TSEM; TASE: TSEM), Ormat Technologies Inc. (NYSE: ORA; TASE: ORA) and LivePerson Inc. (Nasdaq: LPSN); TASE: LPSN). Their overall weight on the index is 20%, which is misleading, because NICE alone takes up 7% (the highest weight of any share on the Tel Aviv 35 Index), while the weight of Ormat and Liveperson is limited because they are incorporated outside of Israel.

After the update in August, tech sector shares will comprise 29% of the market. Without renewable and green energy, which are not considered technology in much of the world, then the tech weight in the Tel Aviv 35 Index will be 24%. For the sake of comparison, tech companies form 24% of the S&P 500 Index, after rising in recent years.

There may be those who oppose such a major structural change as erroneous because of passing volatility due to the coronavirus crisis and will insist that the changes do not accurately reflect the Israeli economy.

However, an examination of the performance of tech shares on the TASE finds that their absolute weight rises even without checking the indices themselves, which sometimes suffer distortions due to the restrictions set by the TASE.

So for example in 2017, even before the indices were last reformed, the weight of the largest 100 tech sector companies on the TASE was just 6.7%, while today it is 19% - in other words it has tripled. The average rise of shares in this sector over the period was 189%. During this period the Tel Aviv 35 Index fell 3.8% while the Tel Aviv 125 Index rose 8%.

It seems that the underperformance by the Tel Aviv 35 Index in recent years has not only hit the prestige of the TASE's leading index but led most investors to prefer exposure to Tel Aviv shares, through direct purchases or mutual funds, which in many cases have yielded better returns.

It is likely that the imminent update of the indices in just over a month will change this picture.

The writer is VP business development at Harel Finances, a subsidiary of Harel Insurance and Finances. The writer and/or companies in the Harel group and/or parties at interest in them and/or the controlling shareholder in the group are likely to hold and/or trade for themselves and/or on behalf of others the securities and financial assets mentioned in this article. This article should not be regarded as investment marketing or a substitute for investment marketing that takes into account the personal and special needs of each investor.

Published by Globes, Israel business news - en.globes.co.il - on June 25, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Energix  / Photo: Company website
Energix / Photo: Company website
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