(Re)Inventing Israeli Capital Markets: Infrastructure for Growth Globes Israel Business Conference December 8, 2014
From Scarcity to Innovation Paradox of Israeli Competitive Advantage From Vegetarian Schnitzel to Space Industry
Israel s Economic Strategy: Leapfrogging ; Government Economic Goals Joint Venture Projects 2013 o Sustainable budget o Knowledge-based Export Surplus o o o International Development Finance Regional Development Finance Initiative Targeted Sector Financial Innovation Lab 2014 o Sustainable growth o Scaling up new capital market credit facilities for SMEs o Economic development: new tools for financial inclusion of people and communities o New approaches to regional development incentives 2015 o Sovereign Capital Fund Established o Expanding PPPs beyond infrastructure o New Models for Israeli export trade 2016 o Debt/GDP 60% o Design and Implement credit facilities for high-tech exports in water, health, and alternative fuels 2023 o Sovereign Capital Fund reaches 5% of GDP o Energy technology/financial hub established o Exporting financial R&D
% of GDP Israel is a leader R&D and is able to convert research to patents R&D and patents 5.00 4.00 Expenditure on R&D 2000 2010 50 40 Triadic patent families (Number per million inhabitants, 2010) 3.00 30 2.00 20 1.00 10 0.00 Czech Republic Israel Poland Turkey OECD 0 Czech Republic Israel Poland Turkey OECD
Israel as a global lab Need Innovative Solutions Local Testing Global Scale Up
Capital Market Challenges
China Saudi Arabia Indonesia India Jordan* Japan New Zealand Iceland Mexico Malaysia* Tunisia Russia Canada Mongolia Korea Kazakhstan Australia Israel Ukraine Peru Austria United States Brazil Switzerland Kyrgyz Republic Norway Turkey Denmark Poland Chile Morocco Latvia Egypt United Kingdom Sweden Czech Republic South Africa Italy Hungary Slovak Republic France Ireland Lithuania Belgium Greece Argentina Colombia Germany Estonia Spain Finland Netherlands Romania Slovenia Portugal More FDI 2011 Inward FDI Stocks (% of GDP) Regulatory environment may affect investment Israel has a more restrictive than average regulatory regime for an OECD nation 0.450 0.400 2012 FDI RR Index¹ Closed = 1; Open = 0 0.80 0.70 0.350 0.300 0.60 0.250 0.50 0.200 0.40 0.150 NON-OECD average 0.30 Israel 0.100 OECD average 0.20 0.050 0.10 0.000 0.00 0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450 Notes: ¹ Incorporates restrictions up to September 2012. *Preliminary scores. Sources: OECD Statistics, IMFand Worldbank. Ireland and Switzerland omitted to facilitate scaling 2012 FDI RR Index (Closed = 1; Open = 0) More Open
Regulatory and business environment may dampen investment Gap in Global Opportunity Index Components from mean for Industrial Countries
NASDAQ Shenzhen GreTai Saudi Korea IMKB Shanghai NYSE Taiwan Japan Deutsche Spanish BM&FBOVESPA Australian TMX Group London Japan Oslo Thailand NASDAQ OMX NYSE(Europe) Budapest Swiss MICEX / RTS India Hong Kong Athens Johannesburg Warsaw Singapore Tel Aviv Egyptian Malaysia Mexican Wiener Indonesia Tehran Philippine Colombia Santiago TSE exhibits relatively low liquidity TSE is 30 th among exchange turnover ratios 250% 200% 150% 100% 50% 0% Source: Milken Institute, 2013
TASE vs. other markets The rate of change in turnover and market value at TASE and in comparison groups December 2009-December 2012 (%) Turnover Turnover normalized to market value Tel Aviv Stock Exchange World average Developed markets Emerging markets average average Average of similar stock markets -44-18 -12-33 -1-35 -26-30 -29-12 Market value -14 12 14 5 31 Source: World Federation Of Exchanges, Bank of Israel adaptations
Market capitalization Shekels Billions (2012 Prices) 1,800 1,600 1,400 1,200 1,000 800 600 400 200 - Reforms to equalize capital gains taxes Israel and abroad, 2003 MSCI reclassification, 2010 376 24 351 837 604 248 261 545 577 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Government Bonds Corporate Bonds Stock & Convertibles Source: Milken Institute, 2013
Bank loans, GDP and long term saving - Israel 2020 forecast: the long term saving balance is 60% greater than GDP and banking credit Long Term Saving (Insurance,Pension & provident funds) Billions (NIS) Credit in the Banking System Billions (NIS) Israel GDP Billions (NIS) 2020E 2011 1,870 1,165 1,160 939 840 872 Source: GDP and credit - economic department forecast. Yearly 8% increase of Long term saving (according to perennial average)
Billions ($) A sharp decrease in the activity of the most significant market participants Local institutional investors Investments abroad VS Israeli Equities in total investment portfolio 21% 19% 17% 15% 13% 11% 9% 7% 5% 12 10 8 6 4 2 0 Foreign investment funds Holdings of TASE equities
Overseas investments global trends Share of overseas investment as a % of total investment in equities by pension funds - 2011 63% 57% 54% 48% 45% 29% 24% 35 % Average of 6 benchmark countries 50 % 1998 2011 Source: BOI, Towers Watson, UBS.
Billions of NIS (2012) Prices TASE Stock Market trading volume Declines after flight of passive investors 700 600 MSCI Upgrade 500 400 300 200 100 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: TASE
Israel s low free float in global perspective Percent 100 90 80 70 60 50 40 30 20 10 0 S&P FTSE MIB Index DAX CAC TA25 TA25* Source: TASE.
Highly concentrated stock market Percent of total companies on TASE Other companies = 30% Big ten firms (with Teva) = 30% Teva = 30% Source: TASE.
Business groups' share of stock market capitalization by country 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Masulis et. al. 2012; Sokolinski, 2012.
Investment Opportunities Folding layers of pyramids Real-financial separation Deleveraging
Competition Enhancement Committee Recommendations Separation of real and financial holdings Flattening of pyramid structures Allotment of public assets
Market Performance: PE Ratio Comparisons
Schematic elements of new platform
Conclusion: Creating a roadmap Think globally Financial Reports in English Compliance with FASB Integrate foreign investors into regs Use international financial metrics Shelf offerings for institutional Distribute research Leverage US-based ETFs Build pre-ipo pools Increase volume and value Attract tech launches and restructurings Authorize BDCs New platform Authorize early stock offerings Leverage TASE as step to world markets Lower cost of registration Less regulatory requirements Subsidize analysts initial coverage
Evaluation of solutions by criteria