Guy Rolnik Unwelcome Truths About Israeli Stocks

On the surface, the figures for the TA-25 index's performance over its 20-year existence are impressive. The underlying facts are much more disappointing.

Guy Rolnik
Guy Rolnik
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Guy Rolnik
Guy Rolnik

Last month the Tel Aviv Stock Exchange published a survey of the changes that had occurred in the Tel Aviv-25, an index tracking the 25 largest-cap companies. First launched in January 1992, the TA-25 - then called the Maof - was the first index for which TASE investors could purchase options. Hence even though the index's name was changed from Maof to TA-25 years ago, players still call it the Maof, and options on it remain called "Maof options".

In its survey, the TASE focused primarily on the great successes of the TA-25. The naked figures are indeed impressive: in 20 years the combined market value of the 25 ballooned from NIS 46 billion to NIS 426 billion.

Roughly half the increase stems from capital raised from investors and some hefty newcomers entering the index. The other half is thanks to the companies' returns to investors.

Over 20 years the TA-25 returned an impressive 370 percent after adjusting for inflation, which comes to 7.7 percent per year.

If someone could confidently declare that the next 20 years would look the same, we would reach out and kiss them. The odds, however, are not in our favor. The past 20 years were marked by a sharp decline in interest rates, which served as the driving force for most of the increase in share prices. Today, when the long and short-term real interest rates are negative, only company profits could push share prices higher.

However, if we take more of an economic perspective and less of a high finance one, we are likely to be disappointed. Over the past 20 years, the names and fundamentally, the types of companies on the TA-25 that have grabbed the lion's share on the exchange haven't changed much.

Just like in 1992, in 2012 the TA-25 is comprised of a lot of banks, monopolies and cartels, with a few real estate and holding companies. Where are the industrial concerns? Where are the star exporters? Where are the success stories of Israelis conquering the world?

They are there, but they're few and far between. NICE Systems and EZchip Semiconductor are success stories, but not giant companies. The Israeli weapons manufacturers grew nicely, but behind this story are a great many years of massive defense budget spending, which has caused much more harm than good. We are left primarily with pharmaceutical star Teva, but in that case, a huge part of the increase in the company's value has come from share-based acquisitions. Teva's Israeli operations have experienced a dramatic drop in growth while its market value has boomed.

The real action can be found beyond the TA-25. Wall Street is where the true start-up nation is found, with listings for both Amdocs and Check Point Software Technologies. On the TASE, the list of companies shows an economy that hasn't changed dramatically. A comparison of the changes in the composition of the TA-25 to the lineup of the most prominent stocks on the leading indices of American stock exchanges leads only to disappointment.

If in the first decade after the launch of the TA-25 there was some real action to be found among the new high-tech and cellular phone companies, in the second and now third decade we have just been spinning our wheels. The local market is overly concentrated, static and doesn't create new opportunities. The Knesset's economic concentration committee is supposed to solve some of these problems, but it's just a start. The private sector in Israel is far from being dynamic, creative or innovative. All of these characteristics are concentrated in the high-tech industry and in the high-tech industry alone.

This article was originally published in the December 2012 edition of TheMarker Magazine.

Inside the Tel Aviv Stock Exchange.Credit: Bloomberg
Inside the Tel Aviv Stock Exchange.Credit: Bloomberg

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