israel in the global equity market

Steven A. Schoenfeld (Northern Trust)&

Glenn Yago (Milken Institute)

October 2009

Israel in the Global Equity MarketIsrael’s Positioning in the Changing Global Marketplace

N O R T H E R N T R U S T G L O B A L I N V E S T M E N T S

© 2006 Northern Trust Corporation northerntrust.com

Israel’s Positioning in the Changing Global MarketplaceIsrael in the Global Equity Market

Steven A. Schoenfeld Chief Investment OfficerGlobal Quantitative [email protected]

March 6, 2008

3 Israel in the Global Equity Market

Overview

Israel’s relative position in world stock markets

Israel’s excellent long-term market performance

Evolution in global equity benchmarks

Israel’s challenge to be “visible” to global investors

Opportunities to increase Israel’s market capitalization


Israel’s Current Position in the Global Equity Markets

Data as of 2/29/08Source: NTGI, MSCI, Factset

Israel’s weight

is 0.27

Israel’s weight is

2.32%

Free Market Cap. Weight (%) # Co's

AC World 29,532,790.8 100.00 2872

USA 12,192,757.2 41.29 635United Kingdom 2,801,683.7 9.49 156Japan 2,655,699.8 8.99 397France 1,338,675.4 4.53 74Canada 1,164,082.4 3.94 105Germany 1,140,408.3 3.86 61Switzerland 897,163.4 3.04 39Australia 836,831.5 2.83 88Spain 524,230.4 1.78 31China 503,411.0 1.70 112Brazil 502,734.9 1.70 69Italy 497,308.6 1.68 40Korea 469,000.3 1.59 113Taiwan 371,955.6 1.26 123Netherlands 353,140.9 1.20 24Russia 332,968.2 1.13 32Sweden 303,532.6 1.03 48Hong Kong 292,338.7 0.99 54India 254,632.0 0.86 63Finland 246,402.3 0.83 23South Africa 223,991.1 0.76 50Mexico 163,423.1 0.55 28Belgium 157,797.1 0.53 22Singapore Free 140,960.5 0.48 37Norway 135,254.8 0.46 22Denmark 124,703.6 0.42 23Malaysia 88,680.7 0.30 56Greece 87,691.4 0.30 15Ireland 86,433.5 0.29 14Israel 79,436.7 0.27 32Austria 71,868.1 0.24 16Indonesia 63,877.8 0.22 23Poland 54,101.4 0.18 28Thailand 52,438.7 0.18 34Turkey 47,109.4 0.16 31Portugal 43,933.9 0.15 11Chile 43,347.2 0.15 27Egypt 31,049.8 0.11 17Czech Republic 27,379.1 0.09 7Hungary 24,414.8 0.08 4Peru 23,983.6 0.08 6Argentina 17,328.1 0.06 11Philippines 16,847.3 0.06 18New Zealand 16,392.3 0.06 10Morocco 12,267.0 0.04 11Colombia 9,812.5 0.03 7Pakistan 6,071.9 0.02 13Jordan 3,238.5 0.01 12

MSCI All Country World Index MSCI Emerging Markets IndexFree Market Cap.Weight (%) # Co's

EM (Emerging Markets) 3,423,500.4 100.00 927

China 503,411.0 14.70 112

Brazil 502,734.9 14.68 69

Korea 469,000.3 13.70 113

Taiwan 371,955.6 10.86 123

Russia 332,968.2 9.73 32

India 254,632.0 7.44 63

South Africa 223,991.1 6.54 50

Mexico 163,423.1 4.77 28

Malaysia -EM 88,680.7 2.59 56

Israel 79,436.7 2.32 32

Indonesia 63,877.8 1.87 23

Poland 54,101.4 1.58 28

Thailand 52,438.7 1.53 34

Turkey 47,109.4 1.38 31

Chile 43,347.2 1.27 27

Egypt 31,049.8 0.91 17

Czech Republic 27,379.1 0.80 7

Hungary 24,414.8 0.71 4

Peru 23,983.6 0.70 6

Argentina 17,328.1 0.51 11

Philippines 16,847.3 0.49 18

Morocco 12,267.0 0.36 11

Colombia 9,812.5 0.29 7

Pakistan 6,071.9 0.18 13Jordan 3,238.5 0.09 12


Israel’s Current Position in the Global Equity Markets

Data as of 2/29/08Source: NTGI, FTSE, Factset

Israel’s weight is 0.25%

Israel weight 2.10%

Free Market Cap Weight (%) # Co'sAll World 31,172,984.2 100.00 2,860

United States 12,809,178.8 41.09 668United Kingdom 2,848,536.9 9.14 134Japan 2,646,567.5 8.49 471France 1,562,641.8 5.01 74Germany 1,200,040.8 3.85 53Canada 1,033,207.0 3.31 56Switzerland 925,492.3 2.97 37Australia 917,634.1 2.94 111Spain 611,999.2 1.96 34Brazil 593,421.6 1.90 74Italy 568,272.5 1.82 44Hong Kong 558,400.8 1.79 110Korea 530,698.0 1.70 99Taiwan 423,800.6 1.36 127Netherlands 379,511.1 1.22 18India 358,298.5 1.15 95China 335,806.4 1.08 88Russia 334,742.0 1.07 23Sweden 323,677.5 1.04 31South Africa 289,464.1 0.93 79Finland 226,426.9 0.73 14Mexico 198,479.1 0.64 26Singapore 156,467.2 0.50 48Belgium / Luxembourg 139,975.5 0.45 16Denmark 130,157.1 0.42 13Norway 130,047.4 0.42 11Malaysia 122,026.0 0.39 39Greece 94,842.6 0.30 11Ireland 86,421.1 0.28 8Israel 77,115.8 0.25 38Austria 73,295.8 0.24 12Indonesia 59,781.4 0.19 16Portugal 58,542.0 0.19 9Thailand 52,965.5 0.17 37Chile 46,252.8 0.15 18Poland 44,813.0 0.14 14Turkey 41,533.1 0.13 21Egypt 28,921.9 0.09 15Hungary 27,604.8 0.09 4Czech Republic 27,576.4 0.09 5New Zealand 19,598.8 0.06 13Colombia 17,604.3 0.06 9Argentina 15,462.6 0.05 6Peru 13,317.3 0.04 4Morocco 13,120.9 0.04 8Philippines 11,400.0 0.04 10Pakistan 7,843.6 0.03 9

FTSE All World Index

Free Market Cap Weight # Co's

3,672,049.7 100.00 864

Brazil 593,421.6 16.16 74

Korea 530,698.0 14.45 99

Taiwan 423,800.6 11.54 127

India 358,298.5 9.76 95

China 335,806.4 9.14 88

Russia 334,742.0 9.12 23

South Africa 289,464.1 7.88 79

Mexico 198,479.1 5.41 26

Malaysia 122,026.0 3.32 39

Israel 77,115.8 2.10 38

Indonesia 59,781.4 1.63 16

Thailand 52,965.5 1.44 37

Chile 46,252.8 1.26 18

Poland 44,813.0 1.22 14

Turkey 41,533.1 1.13 21

Egypt 28,921.9 0.79 15

Hungary 27,604.8 0.75 4

Czech Republic 27,576.4 0.75 5

Colombia 17,604.3 0.48 9

Argentina 15,462.6 0.42 6

Peru 13,317.3 0.36 4

Morocco 13,120.9 0.36 8

Philippines 11,400.0 0.31 10

Pakistan 7,843.6 0.21 9

FTSE Emerging Markets Index


Israel’s Current Position in the Equity Markets

Top 5 companies comprise 71% of the index


Foreign Market IndexInc. Factor Cap Weight

MSCI Israel 79,436.7TEVA PHARMACEUTICAL IND 0.95 37,343.5 47.01ISRAEL CHEMICALS 0.40 7,258.2 9.14BANK HAPOALIM 0.75 4,162.3 5.24BANK LEUMI LE-ISRAEL 0.60 3,994.7 5.03CHECK POINT SOFTW. (USD) 0.80 3,904.5 4.92ISRAEL CORP 0.30 2,566.5 3.23MA MAKHTESHIM-AGAN IND 0.65 2,484.4 3.13BEZEQ ISRAEL TELECOM. 0.40 1,956.5 2.46NICE SYSTEMS 1.00 1,903.8 2.40PARTNER COMMUNICATIONS 0.50 1,664.3 2.10ELBIT SYSTEMS 0.55 1,332.3 1.68CELLCOM ISRAEL 0.40 1,251.1 1.57ISRAEL DISCOUNT BANK 0.45 1,156.4 1.46ORMAT INDUSTRIES 0.70 1,096.2 1.38MIZRAHI TEFAHOT BANK 0.55 945.6 1.19OIL RAFINERIES 0.50 923.8 1.16AFRICA ISRAEL INV 0.25 851.3 1.07KOOR INDUSTRIES 0.55 662.2 0.83DISCOUNT INVESTMENT CORP 0.30 624.5 0.79IDB DEVELOPMENT CORP 0.30 545.7 0.69CLAL INSURANCE ENT. 0.35 418.6 0.53MIGDAL INSURANCE HLDGS 0.25 406.2 0.51HAREL INSURANCE INVEST 0.35 398.6 0.50DELEK GROUP 0.40 389.9 0.49GAZIT GLOBE (1982) 0.45 240.1 0.30ALVARION (USD) 1.00 224.6 0.28STRAUSS GROUP 0.25 189.4 0.24RETALIX 0.85 136.1 0.17ALADDIN KNOWLEDGE SYSTEM 0.85 128.7 0.16GIVEN IMAGING (USD) 0.50 108.5 0.14RADWARE (USD) 0.85 101.1 0.13AUDIOCODES (USD) 0.80 67.5 0.08

MSCI Israel Constituents


Equity Market Performance Comparison

Source: MSCI, Standard & Poor’s, Factset

Data as of 12/31/06 Annualized Performance)

Price Return

Index 1 Year 3 Year 5 Year 10 Year

MSCI World Index 18.0 12.7 8.1 6.1

S&P 500 13.6 8.5 4.3 6.7

MSCI EAFE 23.5 17.2 12.4 5.8

MSCI Emerging Markets 29.2 27.3 23.5 6.7

MSCI Israel -7.1 11.2 7.9 8.1

0

50

100

150

200

250

300

Dec-9

5

Mar

-96

Jun-

96

Sep-9

6

Dec-9

6

Mar

-97

Jun-

97

Sep-9

7

Dec-9

7

Mar

-98

Jun-

98

Sep-9

8

Dec-9

8

Mar

-99

Jun-

99

Sep-9

9

Dec-9

9

Mar

-00

Jun-

00

Sep-0

0

Dec-0

0

Mar

-01

Jun-

01

Sep-0

1

Dec-0

1

Mar

-02

Jun-

02

Sep-0

2

Dec-0

2

Mar

-03

Jun-

03

Sep-0

3

Dec-0

3

Mar

-04

Jun-

04

Sep-0

4

Dec-0

4

Mar

-05

Jun-

05

Sep-0

5

Dec-0

5

Mar

-06

Jun-

06

S&P 500 Emerging Markets Israel The World Index EAFE

Israel Has Delivered Excellent Long Term Returns


Changing Dynamics within Emerging Markets

Large growth of assets under management Surge of inflows in 2005, 2006 and 2007 Some slowing of inflows in 2008 YTD

Significant growth/addition of large EM companies Gazprom Sberbank

Improved data/information quality and more efficient markets

Probable graduation of key “Advanced Emerging Markets” Korea Taiwan Israel

Probable additions to EM asset class in 2008 - 2011 China “A Shares” Gulf Markets Eastern Europe Africa & Caribbean


Measuring ‘Stage of Development’ & Stock Market Maturity - GNI Per Capita (US$):Market Cap Ratio

Source: NTGI, Standard & Poor’s, World Bank

Brazil

Egypt

India

Israel

Korea

Mexico

South Africa

Taiw an

Thailand

United Arab Emirates

Hong Kong

Italy

Japan

Sw itzerland

Argentina

Chile

China Czech RepublicHungary

IndonesiaIran

Kuw ait

Malaysia

Pakistan PhilippinesPoland

Russia

Saudi Arabia

Turkey

CanadaFrance

Germany

Spain

United Kingdom

United States

1.0

10.0

100.0

1000.0

100.00 1,000.00 10,000.00 100,000.00

200

4 M

arke

t C

apit

aliz

atio

n/G

NI

2004 GNI per Capita (US$)


What Will This Evolution Imply for Israel’s Position in the Global Equity Markets?

As investors (both institutional and retail) increase their allocations to the Emerging Market asset class, this does create some visibility for the Israel equity markets.

The following index providers classify Israel as an Emerging Market:

MSCI – the predominant index in Emerging Markets

FTSE – Graduation pending

Standard & Poor’s

S&P/Citi

S&P/IFCI

Graduation to Developed Markets?

FTSE – Graduation Scheduled for June 2008

New regional grouping – “EMEA Developed” (Israel is ‘alone’ in this group)

Two new global index series were introduced in 2007, both classifying Israel as a Developed Market:

Russell Global Index Series

Dow Jones Wilshire Global Index Series

Implications create a challenge for Israel’s visibility in the global equity market


Israel’s Challenge within the Emerging Market Category

As investors (both institutional and retail) increase their allocations to the Emerging Market asset class, this does create some visibility for the Israel equity markets.

Israel previously received about 3-4% of flow, but relative EM market capitalization is now just 2.1% to 2.3%.

Larger companies get visibility from global investors

However, over 65% of the market capitalization is comprised by the top 5 stocks in the index. What does this mean?

Active investors will likely not pick stocks beyond the top of the list

Passive/index investors go somewhat deeper but will likely hold optimized portfolios that will not go substantially beyond the top of the list, especially in global and “integrated international” portfolios.

If situation does not change, Israel’s weight will decrease markedly with the addition of China A shares (2009?/2010?) and/ or select “Frontier Markets” to the standard Emerging Market Universe


This Challenge is Magnified After ‘Graduation’


Pro-Forma outlook of the World markets incorporating the potential graduation of key ‘Advanced Emerging Markets’ by 2010

Market Cap. Weight (%) # Co's

The World Index 27,029,683.0 100.00 1945USA 12,192,757.2 45.11% 635United Kingdom 2,801,683.7 10.37% 156Japan 2,655,699.8 9.83% 397France 1,338,675.4 4.95% 74Canada 1,164,082.4 4.31% 105Germany 1,140,408.3 4.22% 61Switzerland 897,163.4 3.32% 39Australia 836,831.5 3.10% 88Spain 524,230.4 1.94% 31Italy 497,308.6 1.84% 40Korea 469,000.3 1.74% 113Taiwan 371,955.6 1.38% 34Netherlands 353,140.9 1.31% 24Sweden 303,532.6 1.12% 48Hong Kong 292,338.7 1.08% 54Finland 246,402.3 0.91% 23Belgium 157,797.1 0.58% 22Singapore 140,960.5 0.52% 37Norway 135,254.8 0.50% 22Denmark 124,703.6 0.46% 23Greece 87,691.4 0.32% 15Ireland 86,433.5 0.32% 14Israel 79,436.7 0.29% 32

Austria 71,868.1 0.27% 16

Portugal 43,933.9 0.16% 11

New Zealand 16,392.3 0.06% 10

MSCI Country WeightsMarket Cap. Weight (%) # Co's

The World Index 14,836,925.8 100.00 1945United Kingdom 2,801,683.7 18.88% 156Japan 2,655,699.8 17.90% 397France 1,338,675.4 9.02% 74Canada 1,164,082.4 7.85% 105Germany 1,140,408.3 7.69% 61Switzerland 897,163.4 6.05% 39Australia 836,831.5 5.64% 88Spain 524,230.4 3.53% 31Italy 497,308.6 3.35% 40Korea 469,000.3 3.16% 113Taiwan 371,955.6 2.51% 34Netherlands 353,140.9 2.38% 24Sweden 303,532.6 2.05% 48Hong Kong 292,338.7 1.97% 54Finland 246,402.3 1.66% 23Belgium 157,797.1 1.06% 22Singapore 140,960.5 0.95% 37Norway 135,254.8 0.91% 22Denmark 124,703.6 0.84% 23Greece 87,691.4 0.59% 15Ireland 86,433.5 0.58% 14Israel 79,436.7 0.54% 32Austria 71,868.1 0.48% 16Portugal 43,933.9 0.30% 11New Zealand 16,392.3 0.11% 10

MSCI Developed World ex US


Challenges and Opportunities

Israel’s small size in the Dynamic Emerging Market Universe

If situation does not change Israel’s weight will decrease markedly with the addition of China A shares and several ‘Frontier Markets’

FTSE Graduation of Israel to Developed Markets in June

Potential Graduation of Korea, Taiwan and Israel in MSCI Indexes (2009?/2010?)

“Smaller Fish in a Bigger Sea”

Opportunities to raise market capitalization

Essential in any scenario

Factors in the Emerging Markets Landscape


Five remedies that would create visibility and deepen the market…

1. Dual-listing of securities

2. Increase available shares for public purchase (aka Free-Float):

Index Current Average Float

FTSE 0.43

MSCI 0.55

S&P/IFCI 0.53

Opportunities to Raise Israel’s Market Cap

3. Privatization of government-owned companies through the local stock exchange

4. Increase the number and quality of new stock listings in Israel through encouragement of second-tier market

5. Encouragement/facilitation of efficient foreign investment into the market, especially via index-based products (e.g. ETFs and Index Funds) tracking float-adjusted local indexes such as TA-25 and TA-100.


Conclusions and Topics for Discussion

Israel’s position in the global equity markets is dynamic – and further change is inevitable

Regardless of when/how ‘graduation’ to Developed Market occurs, there is a vital need to “raise visibility” of Tel Aviv market before the end of the decade

Five potential initiatives to increase local market capitalization

Israeli initiatives

Foreign initiatives

Collaboration between Israeli market participants, regulators/gov’t and international investors is essential to realize the full potential of Israel’s capital market

Looking to the future…

israel in the global equity market

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