If an alien crash-landed on Ahad Ha’am Street on Monday, he might have gotten the impression that the Tel Aviv Stock Exchange was a thriving stock market. IDI Insurance was fresh off a NIS 204 million initial public offering that was four times oversubscribed. The public tranche shares sold for NIS 77.80 each, nearly NIS 8 above the minimum.
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If the extraterrestrial had stuck around one day longer before demanding to be taken to the bourse’s leaders, he would have witnessed the shares of online translation company Babylon shoot up more than 12% on news it was in merger talks with the app-downloading company IronSource. He would have seen that the TASE’s telecommunications, real estate and biomedical indices are all up close to 20% this year.
But, of course, he would subsequently discover that the bourse’s leaders – chairman Sam Bronfeld and CEO Ester Levanon – are both on their way out. They are being held responsible for the fact that with the exception of a few eddies of bullish activity the TASE is deep in the doldrums.
Daily trading volume has averaged just NIS 1.09 billion so far this year, down from NIS 2.04 billion for all of 2010, the record year. While major world stock markets are posting record highs, the TA-100 index is up a mere 5.5% so far in 2013 and below its 2010 peak.
IDI and a handful of other companies have held IPOs but they pale in comparison with the companies that have or are planning to delist (Mellanox, Clal Industries, Koor Industries, part of the Israel Corporation) or are hedging their bets by dual-listing overseas (Israel Chemicals, Babylon). Some 90 companies have delisted since the start of 2011.
It would be nice to blame somebody for this, preferably somebody who can be called on the carpet or, failing that, ideological enemies. Shmuel Hauser, the chairman of the Securities Authority, seems to blame the problem on Bronfeld and Levnon, who are resigning under duress. Those celebrating the new populist spirit are inclined to blame Nochi Dankner and his fellow tycoons for allegedly abusing the investing public during the go-go years before the financial crisis set in. The remaining capitalists among us blame excessive regulation for discouraging companies from listing on the TASE, the increase in the capital gains tax at the start of last year and the fallout of the 2011 social-justice protests and the damage they have done to corporate profits.
The fact is everyone is to some degree wrong, although Hauser may be the wrongest of all.
It’s not the TASE alone that has been suffering a trading slump, it’s a global phenomenon. On the New York Stock Exchange, an average of about 3.5 billion shares have traded daily this year, down from seven billion in 2009. On the one hand, that’s similar to the decline on the TASE; on the other, Wall Street, unlike Ahad Ha’am, has been unusually profitable for stock market investors of late. If the trading drop-off is a global phenomenon, it is hard to blame the TASE’s management. In this context, it is not surprising that one of the exchange’s biggest problems has been the exodus of foreign investors, who at the peak held more than half of all TASE-traded equities.
Where did they go? The critical event was Israel’s reclassification in the MCSI indices from emerging market to developed market in May 2010. It was a nice feather in Israel’s cap, akin to being admitted to the Organization for Economic Cooperation and Development, but it meant that the foreign institutional investors who benchmark their portfolio to the MSCI weightings sold down Israel. When we were counted among emerging markets we were a biggish fish; now that we are in developed markets, we are a minnow. At worst, the TASE’s leadership can be blamed for having failed to lobby successfully with MSCI to get Israel into the right index.
But the TASE’s problems go beyond the foreign investors. The fact is local investors have fled the market as well. If you examine the distribution of the public’s financial assets, it shows that TASE-traded shares have fallen from 21.4% of the total in 2010 to 15.2% at the end of May. That’s a loss of NIS 117 billion to other investment channels, mainly cash and deposits and shares abroad, according to the Bank of Israel. The development is surprising since, for most of that time the economy has performed well and/or interest rates have been low.
Here is where capitalist and populist can duke it out. On the one hand, a Bank of Israel analysis in its last annual report points to excessive regulation as a factor, noting that the 16% drop in the number of publicly traded companies on the TASE between 2008 and 2012 was bigger than elsewhere. Fewer companies mean fewer trading opportunities, which mean less trading. Score one for the capitalist school. On the other hand, it found that the not-so-business-friendly market reforms since 2011 have not deterred trading in the companies that were affected.
A simple calculus of Cellcom Israel shares bears that out. In the 250 trading sessions before former Communications Minister Moshe Kahlon knocked the wind out of the big cellphone operators in May 2012 by introducing new competition, the number of Cellcom shares traded every day was about 239,400; in the 250 days after, it was just under 235,000, which isn’t a very dramatic change. In shekel terms the drop was close to 60%, but that’s because Cellcom’s share price plummeted.
Anticapitalist hysteria has taken hold in the Israeli media and the Knesset, but it is doubtful that the investing public is much affected by it. More likely is that a lot of money is going into buying homes, either for investment or to live in. This may be a rational investment choice because mortgage rates are low and the public has good reason to believe home prices will continue to rise.
But it might just well be a decision taken out of desperation: The cost of finding shelter is already very high relative to incomes, and only threatens to go higher. So it may not be so much a wise investment choice as the only one for many. If that is so, the wrong heads are rolling. The blame should be laid on those who have let housing suck away Israel’s capital from productive investment and into residential consumption.