Taking Stock / Tokyo Yossi

"No." "No." "No."

Those were the answers we received in writing, just before the holidays, from the offices of Finance Minister Benjamin Netanyahu to questions we had sent the day before.

For a change, "No" was the most optimistic answer we could have imagined.

The questions were simple ones.

1) Did the finance minister mean to retreat from his intention of equalizing capital gains tax on Israeli and foreign securities on January 1, 2005? (No.)

2) Did the finance minister mean to postpone implementation? (No.)

3) Were business and capital market entities trying to persuade the finance minister to delay? (No.)

To recap, at present you pay 15 percent tax on gains made from investment in Israeli securities, be they stocks or bonds or any other domestic financial investment. The same securities hailing from outside Israel will cost you 35 percent tax on gains. The gap was supposed to vanish on January 1, 2004, but the stock market and banks persuaded the second minister at the Finance Ministry, Meir Sheetrit, to delay by a year. (Sheetrit has since left the ministry.) Now parity at 15 percent is supposed to start on January 1, 2005.

Rumors began circulating in recent weeks that Netanyahu was bowing under pressures, and that would leave the gap protecting the Israeli capital market in place for another year. Hence our questions, and his terse replies, which when fleshed out read: No, Bibi is not about to fold.

The issue of tax parity isn't as sexy as the battle over reforming the banks, or the argument over their distribution fees, but it's just as important.

Double exposure

Lowering the tax bite on foreign-made capital gains to the local rate of 15 percent is one of the biggest steps ever taken to expose Israel's market to the outside world. To make it a part of the global marketplace.

Who is actually getting exposed? Both sides in the capital market, savers and investors. Savers are money management companies with which we deposited our short-term and long-term savings. Investors are the corporations that raise money, in whose securities the savings get invested.

From January 1, 2005, the entire worldwide investment world will be open to the Israeli investor. Why buy units in a mutual fund tracking the TA-100 index instead of the S&P-500? Why put your money into the Tel Aviv Stock Exchange rather than into Europe, New York or Tokyo?

At the end of the 2005 first quarter, we will get performance reports from the people managing our investments. And we can compare them with their local rivals - or with the performance of people managing international investment funds.

Israel's investment management industry is facing a whole new era. No longer will investment managers be compared with their peers in our little backwater. No: At the end of each month, quarter or year, they'll be judged by international standards.

How well will they do?

Israel's institutional investors, which manage our money, will have to become leaner, cleaner and meaner, knowing that suddenly they face a whole world of competition.

As for the companies, until now any Israeli firm wanting to raise capital would present the price it hoped to achieve based on comparison with its peer companies in Israel. No more; from 2005 the question will be why compare with it with Israeli peers when the whole world is open to your Tom, Dick and Yossi investor.

Which means? Israeli companies tapping the markets for capital will gradually have to prove they're competitive on a global scale, that their multiples bear global comparison, that their yields do, too, as do their rates of growth.

True, Israelis aren't about to send all their money abroad. The learning curve will be a protracted one. We may assume the process will take about a decade. But at its end, half the public's financial assets will be invested outside.

So the revolution will reach the man in the street belatedly. But it will reach the investors, the money managers and the corporate executives a lot sooner. Unlike commodities, production means or manpower, money flows at rocket speed, at the press of a button. Within two or three years, we can expect our capital market to look completely different.