Tel Aviv Stocks Will Never Play the Violin Again

David Rosenberg
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'So you think it's a bull market and all the patient's other problems will cure themselves? Naw.'Credit:
David Rosenberg

Picture this scene. A group of doctors is assembled around a hospital bed, debating what do with the patient, who seems on the surface to be recovering but also shows troubling signs of serious long-term health issues.

Everyone agrees he'll never be able to play the violin again, but since the patient is the Tel Aviv Stock Exchange, no one was promising anything like that.

A bourse is considered healthy and vital when it serves the economy as a means for businesses to raise capital and for investors to price their holdings and manage that old dilemma of risk versus return.

"Well," says the first doctor. "The patient's benchmark stock index, the TA-25, is at a record high. It took a long time to get there. The stock markets in the United States and Europe were at record highs a long time ago, but the TASE has caught up. Its TA-25 is up almost 10% this year – not bad."

"I agree," says the second doctor. "If the patient's index keeps climbing, that should bring in more investors and more trading volume, which it needs to plays its role as a capital market. And, mind you, this is happening while the economy is slowing. He stayed healthy even during the war over the summer. That could have killed a lot of patients. I, for one, think the TASE is on the road to recovery. "

"Bull," says the third doctor and looks up from the chart. "So you think it's a bull market and all the patient's other problems will cure themselves? The TA-25 is at a record high because people are moving their money into stocks. What else are they going to do it with it? Interest rates are at a record low. But that like a dose of aspirin for a patient with a brain tumor. It's no cure at all.

"In any case, the patient's trading-volume numbers are still very low. Look at this," he says, tapping the chart affixed to a clipboard, "average daily volume in the first eight months of the year was just 1.15 billion shekels." He turns to the visiting American physician: "That's $310 million in your money."

The American doctor looks aghast: "My God, I have stock exchanges back at home where a single stock trades that amount in one day." The other doctors nod slowly; the patient groans.

The third doctor says: "When the TASE wasn't sick like this -- back in 2007 and 2008 -- its average daily turnover was in the range of 2.2 billion to 2.5 billion shekels. It's been in the doldrums for a couple of years now and there's no sign of improvement. I'm worried."

But it's just one company

"You should be, but the problem is worse than you think," says the fourth doctor, an imminent though no less fictitious a diagnostician than Gregory House.

"You didn't see that Israel Chemicals, among the most liquid stocks for our patient, listed for trading on the New York Stock Exchange last week. That means that foreign investors who want to buy and sell in ICL stock don't have to trade on the TASE at all. That can only be a huge setback for our patient's health."

"Doctor, surely you're exaggerating. It's only one company," interrupts the first doctor. "The TASE has done well for years even though many of the best companies in Israel are traded there. Nearly the entire high-tech sector – Amdocs, Check Point, Stratasys – they all trade in the U.S. It's been that way for a long time "

"And the problem is only growing worse," says the fourth doctor. He pauses to take the TASE's pulse, shaking his head. "It's only a metaphor, you know, but it still looks weak.

"Let me explain to you why the dual listing of ICL is such a problem. Did you know, doctor, that eight of the companies comprising the TA-25 are already dial-listed? Did you know that The Israel Corporation plans to split into two and place half its holdings into a New York-listed holding company? Did you know Delek Group is planning to dual-list in London? The TASE is being hollowed out. How can the patient survive deprived of such vital nutrients?"

Adds the third doctor: "I might add that the TASE needs to become a home for high-tech companies. They're too big a part of the economy to be ignored. It's bad enough that so many startups are sold to multinational companies, but the wave of initial public offerings by tech companies isn't much better. Not a single one has chosen to list on the TASE. They even prefer London over Tel Aviv."

He waves his finger at the first and second doctors. "In the last year, just four companies went public on the TASE -- not a single tech company was among them and only one used the IPO to raise capital. And this was a year when the TA-25 was climbing to a record high! What does that tell us about the TASE as a capital market? Capital prefers to go elsewhere."

Answers the second doctor: "Listen, doctor, it's hard to be a small, national bourse these days. With all the mergers between the big exchanges in the U.S. and Europe creating multinational giants -- our patient will have trouble recovering in this kind of environment."

He takes a deep breath. "Anyhow, all you do is point to symptoms. Do you have a cure?"

Cure at any cost

"We have to try everything," says the fourth doctor. "The patient's family – the Israeli economy – needs him. He shouldn't be taken for granted. But then, I'm sure you've read the literature from the Israel Securities Authority?"

The second doctor shifts his weight from one foot to the next.

"So, I'll tell you. The TASE needs to become a more dynamic organization. It should be incorporated as a for-profit corporation to make it more business- and marketing-oriented and put an end to conflicts of interest between it and its members. It should introduce new financial products, it should make it easier for foreign banks to become members and has to cut trading fees. It should encourage more online trading. There's a lot that could be done."

"Don't forget high-tech companies," adds the third doctor.

"You couldn't be more correct. You must have been a student of mine. The Israel Securities Authority report says the TASE should turn itself into a platform for young tech companies to raise capital and trade on it."

"That's all fine and good, but is anyone administering the cure?" asks the first doctor angrily.

"Yes," answers the third doctor."The TASE now has a new Elite Tech index to bring attention to its high-tech companies and it has begun a course of treatment under which small tech companies will get analyst coverage. That's important if they are going to attract more investors. The bourse has launched some new financial products, including a new bond index this week.

"But there is still a lot to be done. The TASE's listing companies need to behave more like publicly traded businesses rather than family enterprises with a few outside shareholders. There has to be a culture of more disclosure and transparency, of investor relations"

"But, enough of the TASE for now," says the fourth doctor."Let's move over to the next bed. The finance minister is waiting for us. It's a very sad and increasingly hopeless case "