Will the Tel Aviv Stock Exchange succumb to global instability?
By SAM SERstock exchange 88 224(photo credit: Bloomberg)
The view from Shlomo Maoz's 29th floor office, overlooking Tel Aviv's financial district and the calm blue waters of the Mediterranean, is an impressive one, a confident one. It is, in a word, a view of prosperity.
Indeed, it is five straight years of strong economic growth that Maoz, chief economist of the investment firm Excellence Nessuah, has agreed to discuss. By all accounts, heady times have arrived for the country's economy, and Maoz is eager to explain how they got here.
But his cellphone's shrill ring keeps breaking the mood.
"Shlomo," cries a client, the editor of one of the country's highbrow magazines, "the markets are plummeting. What should we do?" The same refrain comes pouring through the speaker as, one after another, clients, brokers and analysts seek guidance through a gathering storm in the world's financial markets.
"Well," he says with a sigh, "we've got a panic." Tokyo, Hong Kong, Mumbai - all across Asia, markets are heading down with some of their biggest single-day losses in years. The same goes for Europe and South America. There's hardly a major stock market in the world that posts a gain.
Israel's sole stock exchange follows suit. On one especially gloomy day, 98 of the stocks in the Tel Aviv 100 index close at a loss. The declines continue throughout this week, with all the major news media devoting significant time and space to what has suddenly become a very worrying trend.
A total collapse, this isn't. Just as quickly as they fall, the Asian markets rise again. In the West, markets tumble a bit further, though at a slower rate. Uncertainty reigns, however, as no one seems to know how bad things will get, or how long the downturn will last.
Now rewind to the close of 2007 and it's no wonder Bill Gates, Warren Buffett and Donald Trump have been sweet-talking Israel lately. That the country's economy has been humming along is the worst-kept secret in the world's business circles.
Consider: Exports in the past year were nearly double what they were only five years ago. The shekel is at its strongest in a decade, now hovering around 3.7 to the dollar. Unemployment is at its lowest in a decade, dropping to 6.6 percent at the end of 2007. The country just registered its fourth straight year of at least 5% growth, a handsome rate by all accounts.
It would be impressive enough for a stable economy to brush off a fierce intifada and a painful war in Lebanon, as Israel's has. For a country that has had as bumpy a ride as this one, though, it's nothing less than a stunning turnaround.
PROGRESS HAS been so great and so swift that observers would be excused for confusing the Tel Aviv Stock Exchange with a runaway train.
This week the exchange announced a major new agreement with the French stock exchange that should increase volume on both. That joins formal agreements signed in the past year with New York's NASDAQ and the London Stock Exchange, two of the world's biggest. Another agreement, with a major Asian market, is in the works.
Tel Aviv's sudden popularity is no mystery for a market fresh on the heels of a 31 percent rise in its benchmark index for 2007. For the four years 2004 through 2007, the TA-25 rose 175% - more than four times the figure for New York's markets for that time frame and only slightly behind the unparalleled performance of the less stable emerging markets.
With all this activity, you'd expect to find the TASE bustling with the frantic shouts of traders trying desperately to fill their customers' orders. And indeed, a visit to the exchange on Rehov Ahad Ha'am in Tel Aviv's financial district reveals a trading floor filled with the cacophony familiar to market watchers around the world. Only now, that overwhelming din is supplied by the soundtrack to the three-minute film shown at the exchange's visitors center, the modern but sleepy inheritor of the old-time trading floors. There hasn't been any paper flying in the pit of the TASE for almost 10 years now, the last such activity closing down in 1999 as the exchange completed its turnover to fully computerized trading.
The architect of that revolution was Esther Levanon, who came to the exchange in January 1986 after a dozen years with the Shin Bet, having set up and run the security agency's computer department after her PhD work at the Technion.
"At the time there were several dozen traders delivering orders, with battalions of typists inputting the data," she recalls.
Now, says Levanon, currently CEO of the exchange, more than half the employees of the exchange work to operate and maintain the computer system. That computerization has transformed the TASE into one of the most advanced stock markets in the world.
"If anything, we're too fast," Levanon says with a grin. "Processes that take three days to complete in New York, we do in a day." Speed is necessary, she says, because "things change so quickly today. A modern exchange needs to listen to the market, to follow the trends, to be flexible."
One way in which the TASE has done this is through the offering of exchange traded funds (ETFs), a blend of stocks and managed funds that have been gaining a bigger and bigger share of investments since New York's S&P 500 index first became tradable as an ETF in the 1990s. Today, 20% of the TASE's trading volume is in these instruments.
Last February, Tel Aviv began to market the Tel-Bond 20, an index of the top 20 corporate bonds. This month, it is introducing the Tel-Bond 40 (the leading 40 corporate bonds after the top 20), and it will soon offer the Tel-Bond 60 as a composite of these bonds.
In 2007, Levanon notes, firms raised NIS 100 billion through the sale of corporate bonds on the TASE.
AFTER AN initial spurt of growth in the early days of the state, the country's economy ground to a near standstill in the 1970s. In the early 1980s, following a crisis in the stock market that forced the government to take over the country's four largest banks, annual inflation spun out of control to a crushing 300%. Reforms put in place in 1985 had, within 10 years, brought that figure down to a more manageable 10%.
Further reforms based on the recommendations of the Bachar Commission, passed in the Knesset in 2005 by then-finance minister Binyamin Netanyahu, have opened up the country's financial markets in ways that make investing cheaper, easier and more transparent.
"In all, there have been significant reforms in the labor market, in the stock market, in the communications market, in higher education, in transportation - you name it," says Maoz. "It has taken years for these reforms to take effect, but now they are really being felt."
Still, Maoz says, "all this wasn't enough. The budget was still too large. Netanyahu cut the budget and forced many of those who were on the public dole to go out and work. Since then we have seen a higher rate of participation in the workforce, especially among women. We have also seen an increase in the hours of work among women."
Together with the contributions of more than a million immigrants from the former Soviet Union, this has translated into higher production. Even with tax cuts in the past few years, Maoz notes, the government's collection of tax income has increased because people are producing more and buying more than they did in the past.
These factors have given local companies the opportunity to grow. But it is a certain mind-set that has led some firms to seize that opportunity more than others, says Neil Cohen of Israel Seed Partners.
"Growth in Israel over the past few years is a testament to Israeli entrepreneurship, to the revolution created in the past 10 years by [tycoons] like Lev Leviev, Yitzhak Tshuva, Nochi Dankner and the Ofer brothers," Cohen says.
"It's also a byproduct of hi-tech firms and real estate firms being aggressive about developing markets abroad. Because the local market is small, and because their products and services are applicable to much larger markets abroad, these companies have gone overseas looking for new mountains to climb."
Climb they have, whether it be hi-tech firms like Check Point going from start-up David to software Goliath, or real estate developers "taking over" Manhattan and European cities.
It's been a hell of a run, to be sure. But it may be ending.
"The US and Western Europe are facing an economic slowdown that is the result of very cheap credit," Cohen notes. "When everybody gorged themselves on that very cheap credit, it led to asset price inflation, and now the music has stopped. It's going to have an effect on economic growth not only in the US and Western Europe, but around the world. And no economy is going to be immune from that.
"I don't know exactly how much that is going to effect growth in Israel, but much of the rise in our stock market over the past five years has been the result of Israeli companies being successful abroad. If the markets that we sell to, and the markets where we have assets, slow down, that's going to have an impact on the profit growth of Israeli companies."
TEL AVIV'S stock exchange has surged as the country's economy has expanded. That in turn has spurred interest from foreign investors - who, Levanon says, now account for more than a quarter of the funds invested here. They are attracted, she says, to the efficiency, ease and transparency of the market, but also to its newfound maturity and stability.
"When our average daily trading volume had grown to NIS 100 million," Levanon recalls, "large institutional investors from abroad would say, 'Hey, it's wonderful that things are going well over there, but I can't invest because any move I would make would dramatically alter the market.' Now that the average trading volume is NIS 2 billion per day, that isn't a problem anymore."
Ironically, one of the keys to that growth has been the number of local companies traded on foreign exchanges. By adopting a dual listing law, Israel gets to "keep" local companies here by allowing them to raise money on foreign exchanges without forcing them to give up their place on the TASE.
Some 70 Israeli companies are listed on the NASDAQ exchange, for example, and 70% of them maintain their listing at home as well. The London Stock Exchange hosts more than 30 Israeli companies that are also listed on the TASE.
"Dual listing is a 'win-win-win' situation," says Levanon. "It's good for the customer, who has more choices; it's good for Israeli companies, which can raise more money; and it's good for our exchange, which retains strong companies."
Dual listing does not make sense for all of Tel Aviv's nearly 650 companies, though.
"Take Strauss-Elite for example," Levanon says. "The local market knows the company, while others from abroad don't know it as well. So only the local market can give it an accurate price.
"Hi-tech companies, on the other hand, are different because their products aren't limited to the local market; they're meant for a more global market. Therefore it makes sense for them to look abroad to raise funds. We don't feel as if it's an act of betrayal for Israeli companies to raise money abroad."
Still, Levanon is leading the TASE away from dual listings and toward "mutual recognition," as in the latest agreement with France. Companies from either country will be allowed to list securities for trade on the other country's stock market, as their prospectuses will now be recognized. Since differences in the way that various countries evaluate companies' business paperwork present a major impediment to such activity, the move is expected to encourage investment.
"The agreement will provide Israeli companies with international exposure, widen their investor base, enable foreign companies to register for trade on the Tel Aviv Stock Exchange and diversify investment opportunities," the Israel Securities Authority said in a statement marking the first mutual recognition deal with a foreign authority.
The agreement brings Israel closer to the European Union. More than that, though, it is another step forward from the small, noisy trading pit to a place of prominence on the world's financial stage.
"Globalization," says Levanon, "is the future of the TASE."
