Israel Loses Potentially Lucrative Bid to Join European Index

Inclusion in Morgan Stanley's MSCI would have added sorely needed boost of billions of euros in foreign investment.

Israel lost its bid for inclusion in Morgan Stanley's MSCI Europe index on Tuesday, a decision that could consequently cost the country's capital market a sorely needed boost of billions of euros in foreign investment.

In its annual market classification review, MSCI Inc. decided to leave the lineup of countries included in its European index of developed economies unchanged, as well as the MSCI Europe & Middle East Index in which Israel is already included.

"The majority of international institutional investors that participated in the consultation do not consider the MSCI Israel index to be part of their European investment opportunity set and hence, are not supportive of an inclusion of the MSCI Israel Index in the MSCI Europe index," the company explained. "However, a smaller subset of institutional investors has started to include some Israeli stocks in their European portfolios."

Sebastien Lieblich, head of global indices at MSCI, told Bloomberg news back in April that Israel's inclusion in the European index remained in doubt due to mixed investor feedback over such a move.

MSCI decided in 2009 to assign Israel to its list of developed nations after having previously rated the country as a developing market. The decision announced at that time pointed out that the sole concern by foreign institutional investors over the reclassification was the relatively short clearing cycle of stocks traded in Tel Aviv.

However, rather than having Israel included in the regional MSCI Europe index for developed economies, a new regional index was established combining Europe and the Middle East.

Israeli investors had eagerly awaited the MSCI decision, hoping a reclassification would breathe new life into the Tel Aviv Stock Exchange where trading volumes have been drying up over the past year. A pouring in of billion of euros was anticipated had Israel been reassigned to the European index.

"Our capital market is slipping away," TASE CEO Ester Levanon warned last month in a conference dealing with foreign investment. Levanon, well aware that the stock exchange is the Israeli economy's main lifeline, has been trying for the past year to attract foreign investors to Israel. "I could tell about our activity for bringing in foreign investors, like our conference we're holding next month in London or many other marketing activities, but there's not much sense in talking about it when we're in a do or die situation," she said.

The MSCI decision indicates that not only are local investors fleeing abroad, but that foreign investors also don't see the Israeli market as an attractive venue for investment.

At the entrance to the Tel Aviv Stock Exchange, 2011.
Bloomberg