Taking Stock / Sir, NIS 1.8 Trillion Is Calling

She's 70 years old. Who'da thought it; she looks so young.

Yes, the Tel Aviv Stock Exchange is celebrating its 70th birthday. Expect articles on what it's undergone in the past seven decades and in 2005, which was a terrific year for the third time in a row.

But before we sum up the year and start orating about the myriad shoals ahead in 2006, let's take a broader view. Let's look at the 10 greatest structural changes in the capital market during the last decade.

* The breadth and depth of the market: First, the provident funds were unleashed onto the marketplace, then the insurance companies, and finally the pension funds. We never had so many long-term players in the local marketplace before, and the pace at which money is moving from non-tradable deposits at the treasury to free market investments is accelerating from day to day.

Furthermore, two years ago the state began to gradually, but clearly eliminate non-contributory pensions that bypassed the capital market entirely. Today, most Israeli pension money is routed to the free market. That is not only breadth, it's depth: in the last decade, the liquidity on the market has dramatically improved because of the establishment of a derivatives market and full systems computerization.

* Segregating banking from capital market advice and asset management: Haaretz has been calling for such segregation for years. We admit we did not expect a finance minister to come along and adopt the idea with such fervor and stand his ground as the pressures mounted. We had not dreamed the reform would be passed and implemented as smoothly, and quickly, as during the last three months.

One can only regret the dominance of the insurance companies in the reform, but if we recall where we stood a year ago, then the dimensions of the revolution become clear. Its full impact will be revealed only in upcoming years. Investors have more choices than ever, and managers have greater incentive to produce results. There are fewer and fewer captive investors, and more and more informed clients.

* Opening the capital market to the international marketplace: It began with liberalization of the forex market, and moved onto tax parity. There are a few anachronisms lying about, but most of the job has been done.

As long as our capital market was hermetically sealed, every five or seven years it would boil over, leaving investors burned and crying. Now that the market is open and billions of dollars stream in and out each year, the risks are lower. Investors can diversify risk, and the benchmarks are clearer, and higher.

* More sophisticated investment instruments are appearing: Israeli investors - from the little man in the street to giant speculators - have never had such choices before: options, short selling, structured deposits, futures, foreign and local ETFs, you name it. Not a quarter passes without some new instrument popping up. ETFs in particular stand out, having mushroomed from zero to NIS 10 billion in less than two years, offering investors high liquidity and low fees.

* Analyses and reports on securities, interest rates, currencies, microeconomics and macroeconomics, and debt ratings: Never before have resources of such a magnitude been directed to equity research. Don't forget the downside of the reports and the inherent conflicts of interest, but that said, the entire sector has risen a league.

* It may sound trivial, but don't ignore it - the arrival of foreign investors: It began exactly 10 years ago. At the time, some claimed it was a passing whim and they'd vanish as quickly as they popped up, as soon as they noticed cracks in the Israeli economy. Well, they're still here; they're more dominant than ever before; they have become members of the Tel Aviv Stock Exchange; they are providing banking, underwriting, market making and analysis; they are buying and selling; and they've made us part of the international marketplace.

* Proper disclosure in accounting: This may be the best place we compare favorably with the West: the quality of Israeli accounting and disclosure is among the highest in the world, second only to the U.S. Fraud always has happened and will continue, but the infrastructure in place is strong.

* Tax parity: We have a way to go here. Tax distortions and discrimination have retreated to their lowest-ever level due to two reforms over the last four years. The reforms aren't over: tens of billions of shekels remain locked up in insurance and pension plans due to archaic tax laws, and we are still waiting for IRAs to arrive. But the direction is clear.

* Our macroeconomic environment has become more stable than ever: This may be the most important change of all. Hyperinflation is history, and fiscal responsibility is etched into the minds of our economic leaders. Even the "caring politicians" calling for the budget to be breached will be forced to adapt to the rules of the game if and when they take power.

* Information: The Israeli investor has never before been exposed to so much accessible information. The Internet revolution has made investors more knowledgeable and sophisticated, and kept them in touch and in the loop.

Do these 10 changes assure that the boom will continue in 2006? No. Stock markets rise, only to fall. Interest rates are rising around the world, which depresses the local market. Politics will force uncertainty into the arena in the upcoming months. Some of the shooting stars of 2005 will crash and burn next year.

But our market is better prepared than ever to meet the challenges that await, and it will be the main channel of communications between the local and foreign investment community and Jerusalem. When NIS 1.8 trillion talks, our leaders will have no choice but to listen.