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Israel in the Global Equity Market

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  • 1. Steven A. Schoenfeld (Northern Trust) & Glenn Yago (Milken Institute) October 2009 Israel in the Global Equity Market Israel’s Positioning in the Changing Global Marketplace
  • 2. N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S © 2006 Northern Trust Corporation northerntrust.com Israel’s Positioning in the Changing Global Marketplace Israel in the Global Equity Market Steven A. Schoenfeld Chief Investment Officer Global Quantitative Management [email_address] 212.339.7102 March 6, 2008
  • 3. Overview
    • Israel’s relative position in world stock markets
    • Israel’s excellent long-term market performance
    • Evolution in global equity benchmarks
    • Israel’s challenge to be “visible” to global investors
    • Opportunities to increase Israel’s market capitalization
  • 4. Israel’s Current Position in the Global Equity Markets Data as of 2/29/08 Source: NTGI, MSCI, Factset Israel’s weight is 0.27 Israel’s weight is 2.32% Free Market Cap. Weight (%) # Co's AC World 29,532,790.8 100.00 2872 USA 12,192,757.2 41.29 635 United Kingdom 2,801,683.7 9.49 156 Japan 2,655,699.8 8.99 397 France 1,338,675.4 4.53 74 Canada 1,164,082.4 3.94 105 Germany 1,140,408.3 3.86 61 Switzerland 897,163.4 3.04 39 Australia 836,831.5 2.83 88 Spain 524,230.4 1.78 31 China 503,411.0 1.70 112 Brazil 502,734.9 1.70 69 Italy 497,308.6 1.68 40 Korea 469,000.3 1.59 113 Taiwan 371,955.6 1.26 123 Netherlands 353,140.9 1.20 24 Russia 332,968.2 1.13 32 Sweden 303,532.6 1.03 48 Hong Kong 292,338.7 0.99 54 India 254,632.0 0.86 63 Finland 246,402.3 0.83 23 South Africa 223,991.1 0.76 50 Mexico 163,423.1 0.55 28 Belgium 157,797.1 0.53 22 Singapore Free 140,960.5 0.48 37 Norway 135,254.8 0.46 22 Denmark 124,703.6 0.42 23 Malaysia 88,680.7 0.30 56 Greece 87,691.4 0.30 15 Ireland 86,433.5 0.29 14 Israel 79,436.7 0.27 32 Austria 71,868.1 0.24 16 Indonesia 63,877.8 0.22 23 Poland 54,101.4 0.18 28 Thailand 52,438.7 0.18 34 Turkey 47,109.4 0.16 31 Portugal 43,933.9 0.15 11 Chile 43,347.2 0.15 27 Egypt 31,049.8 0.11 17 Czech Republic 27,379.1 0.09 7 Hungary 24,414.8 0.08 4 Peru 23,983.6 0.08 6 Argentina 17,328.1 0.06 11 Philippines 16,847.3 0.06 18 New Zealand 16,392.3 0.06 10 Morocco 12,267.0 0.04 11 Colombia 9,812.5 0.03 7 Pakistan 6,071.9 0.02 13 Jordan 3,238.5 0.01 12 MSCI All Country World Index MSCI Emerging Markets Index Free Market Cap. Weight (%) # Co's EM (Emerging Markets) 3,423,500.4 100.00 927 China 503,411.0 14.70 112 Brazil 502,734.9 14.68 69 Korea 469,000.3 13.70 113 Taiwan 371,955.6 10.86 123 Russia 332,968.2 9.73 32 India 254,632.0 7.44 63 South Africa 223,991.1 6.54 50 Mexico 163,423.1 4.77 28 Malaysia -EM 88,680.7 2.59 56 Israel 79,436.7 2.32 32 Indonesia 63,877.8 1.87 23 Poland 54,101.4 1.58 28 Thailand 52,438.7 1.53 34 Turkey 47,109.4 1.38 31 Chile 43,347.2 1.27 27 Egypt 31,049.8 0.91 17 Czech Republic 27,379.1 0.80 7 Hungary 24,414.8 0.71 4 Peru 23,983.6 0.70 6 Argentina 17,328.1 0.51 11 Philippines 16,847.3 0.49 18 Morocco 12,267.0 0.36 11 Colombia 9,812.5 0.29 7 Pakistan 6,071.9 0.18 13 Jordan 3,238.5 0.09 12
  • 5. Israel’s Current Position in the Global Equity Markets Data as of 2/29/08 Source: NTGI, FTSE, Factset Israel’s weight is 0.25% Israel weight 2.10%
  • 6. Israel’s Current Position in the Equity Markets Top 5 companies comprise 71% of the index Data as of 2/29/08 Source: NTGI, MSCI, Factset
  • 7. Equity Market Performance Comparison Source: MSCI, Standard & Poor’s, Factset Data as of 12/31/06 Annualized Performance) Israel Has Delivered Excellent Long Term Returns 8.1 7.9 11.2 -7.1 MSCI Israel 6.7 23.5 27.3 29.2 MSCI Emerging Markets 5.8 12.4 17.2 23.5 MSCI EAFE 6.7 4.3 8.5 13.6 S&P 500 6.1 8.1 12.7 18.0 MSCI World Index 10 Year 5 Year 3 Year 1 Year Index Price Return
  • 8. Changing Dynamics within Emerging Markets
    • Large growth of assets under management
      • Surge of inflows in 2005, 2006 and 2007
      • Some slowing of inflows in 2008 YTD
    • Significant growth/addition of large EM companies
      • Gazprom
      • Sberbank
    • Improved data/information quality and more efficient markets
    • Probable graduation of key “Advanced Emerging Markets”
      • Korea
      • Taiwan
      • Israel
    • Probable additions to EM asset class in 2008 - 2011
      • China “A Shares”
      • Gulf Markets
      • Eastern Europe
      • Africa & Caribbean
  • 9. Measuring ‘Stage of Development’ & Stock Market Maturity - GNI Per Capita (US$):Market Cap Ratio Source: NTGI, Standard & Poor’s, World Bank 2004 Market Capitalization/GNI 2004 GNI per Capita (US$)
  • 10. What Will This Evolution Imply for Israel’s Position in the Global Equity Markets?
    • As investors (both institutional and retail) increase their allocations to the Emerging Market asset class, this does create some visibility for the Israel equity markets.
    • The following index providers classify Israel as an Emerging Market:
      • MSCI – the predominant index in Emerging Markets
      • FTSE – Graduation pending
      • Standard & Poor’s
        • S&P/Citi
        • S&P/IFCI
    • Graduation to Developed Markets?
      • FTSE – Graduation Scheduled for June 2008
      • New regional grouping – “EMEA Developed” (Israel is ‘alone’ in this group)
    • Two new global index series were introduced in 2007, both classifying Israel as a Developed Market:
      • Russell Global Index Series
      • Dow Jones Wilshire Global Index Series
    • Implications create a challenge for Israel’s visibility in the global equity market
  • 11. Israel’s Challenge within the Emerging Market Category
    • As investors (both institutional and retail) increase their allocations to the Emerging Market asset class, this does create some visibility for the Israel equity markets.
    • Israel previously received about 3-4% of flow, but relative EM market capitalization is now just 2.1% to 2.3%.
    • Larger companies get visibility from global investors
    • However, over 65% of the market capitalization is comprised by the top 5 stocks in the index. What does this mean?
      • Active investors will likely not pick stocks beyond the top of the list
      • Passive/index investors go somewhat deeper but will likely hold optimized portfolios that will not go substantially beyond the top of the list, especially in global and “integrated international” portfolios.
      • If situation does not change, Israel’s weight will decrease markedly with the addition of China A shares (2009?/2010?) and/ or select “Frontier Markets” to the standard Emerging Market Universe
  • 12. This Challenge is Magnified After ‘Graduation’ Data as of 2/29/08 Source: NTGI, MSCI, Factset Pro-Forma outlook of the World markets incorporating the potential graduation of key ‘Advanced Emerging Markets’ by 2010
  • 13. Challenges and Opportunities
    • Israel’s small size in the Dynamic Emerging Market Universe
      • If situation does not change Israel’s weight will decrease markedly with the addition of China A shares and several ‘Frontier Markets’
    • FTSE Graduation of Israel to Developed Markets in June
    • Potential Graduation of Korea, Taiwan and Israel in MSCI Indexes (2009?/2010?)
      • “ Smaller Fish in a Bigger Sea”
    • Opportunities to raise market capitalization
      • Essential in any scenario
    Factors in the Emerging Markets Landscape
  • 14.
    • Five remedies that would create visibility and deepen the market…
      • Dual-listing of securities
      • Increase available shares for public purchase (aka Free-Float):
    Opportunities to Raise Israel’s Market Cap
      • Privatization of government-owned companies through the local stock exchange
      • Increase the number and quality of new stock listings in Israel through encouragement of second-tier market
      • 5. Encouragement/facilitation of efficient foreign investment into the market, especially via index-based products (e.g. ETFs and Index Funds) tracking float-adjusted local indexes such as TA-25 and TA-100.
    0.53 S&P/IFCI 0.55 MSCI 0.43 FTSE Current Average Float Index
  • 15. Conclusions and Topics for Discussion
    • Israel’s position in the global equity markets is dynamic – and further change is inevitable
    • Regardless of when/how ‘graduation’ to Developed Market occurs, there is a vital need to “raise visibility” of Tel Aviv market before the end of the decade
    • Five potential initiatives to increase local market capitalization
      • Israeli initiatives
      • Foreign initiatives
    • Collaboration between Israeli market participants, regulators/gov’t and international investors is essential to realize the full potential of Israel’s capital market
    Looking to the future…

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