Stock market crisis beginning to reach general public in Israel - Haaretz

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Sun., August 19, 2007 Elul 5, 5767

Israel Time: 16:47 (EST+7)

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Last update - 02:24 19/08/2007

Stock market crisis beginning to reach general public in Israel

By Hagai Amit, Haaretz Correspondent

The stock market crisis is now reaching the general public, and they may soon begin to feel the pain.

In the first two weeks of August, provident funds, a major pension investment for much of the public, lost 4.5 percent on average. Considering that the entire sector showed gross nominal yields of 8.77 percent since the beginning of the year, then over half of this value has already been wiped out in only two weeks.

Altogether, the lost value is NIS 12 billion out of a total of NIS 274 billion that the funds manage.

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Such an enormous loss in such a short amount of time is almost unimaginable - especially since the provident funds are defined as "pension savings." However, these funds turned out to be no different than those in other investment sectors.

Even supposedly stodgy long-term funds are invested in stocks and bonds, in Israel and overseas. And given the fact that we have seen only red in every investment sector over the past two weeks, there is no reason the provident funds should be any different.

Simple math shows that if provident funds held 30 percent of their assets in stocks, then the 8 percent fall since the beginning of August in the general stock indexes translates into a 2.5 percent drop for the funds. Assuming that the rest of their assets are invested in bonds, which showed a 3 percent loss so far this month, then this means an additional 2.1 percent drop for the funds.

This is, of course, only an interim result for the two worst months of the year, and clearly many traders expect a recovery - which they believe could begin even today.

But in any case, these figures illustrate the saying: "When it rains on the market, everyone gets wet" - even those invested in relatively safe long-term investments (though some come out better than others). Pension investments are no different.

However, provident funds are considered to be less vulnerable to redemptions than mutual funds, and the public is not hurrying to switch out of provident funds to bank deposits and savings plans, as with mutual funds. Nevertheless, even if there is a tax penalty for switching out of provident funds - most of the money in the funds is actually liquid and can move with no loss of value or tax penalty today. But a few months of negative yields would very likely change this, too, and will lead to an outflow from provident funds.

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