(Re)Inventing Israeli Capital Markets: Infrastructure for ...wink.globes.co.il/conference/2014/ibc2014/... · Milken Innovation Center Israel’s Economic Strategy: Leapfrogging Government

Jerusalem Institute

Milken Innovation Center

Jerusalem Institute


(Re)Inventing Israeli Capital Markets:

Infrastructure for Growth

Globes Israel Business Conference

December 8, 2014

Jerusalem Institute


Jerusalem Institute


From Scarcity to Innovation

Paradox of Israeli Competitive Advantage

From Vegetarian Schnitzel to

Space Industry

Jerusalem Institute


Jerusalem Institute


Israel’s Economic Strategy: Leapfrogging

Government Economic Goals Joint Venture Projects

2013 o Sustainable budget

o Knowledge-based Export Surplus

o International Development Finance

o Regional Development Finance Initiative

o 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

;

Jerusalem Institute


Jerusalem Institute


Israel is a leader R&D and is able to convert

research to patents

R&D and patents

0.00

1.00

2.00

3.00

4.00

5.00

Czech Republic Israel Poland Turkey OECD

% o

f G

DP

Expenditure on R&D

2000 2010

0

10

20

30

40

50

CzechRepublic

Israel Poland Turkey OECD

Triadic patent families (Number per million inhabitants,

2010)

Jerusalem Institute


Jerusalem Institute


Need Innovative Solutions

Local Testing Global

Scale Up

Israel as a global lab

Jerusalem Institute


Jerusalem Institute


Capital Market Challenges

Jerusalem Institute


Jerusalem Institute


Regulatory environment may affect investment Israel has a more restrictive than average regulatory regime for an OECD nation

OECD average

NON-OECD average

0.000

0.050

0.100

0.150

0.200

0.250

0.300

0.350

0.400

0.450

Ch

ina

Sa

ud

i Ara

bia

Ind

on

esi

aIn

dia

Jord

an

*Ja

pa

nN

ew

Ze

ala

nd

Ice

lan

dM

exi

coM

ala

ysi

a*

Tu

nis

iaR

uss

iaC

an

ad

aM

on

go

liaK

ore

aK

aza

kh

sta

nA

ust

ralia

Isra

el

Uk

rain

eP

eru

Au

stri

aU

nit

ed

Sta

tes

Bra

zil

Sw

itze

rla

nd

Ky

rgy

z R

ep

ub

licN

orw

ay

Tu

rke

yD

en

ma

rkP

ola

nd

Ch

ileM

oro

cco

Latv

iaE

gy

pt

Un

ite

d K

ing

do

mS

we

de

nC

zech

Re

pu

blic

So

uth

Afr

ica

Ita

lyH

un

ga

ryS

lov

ak

Re

pu

blic

Fra

nce

Ire

lan

dLi

thu

an

iaB

elg

ium

Gre

ece

Arg

en

tin

aC

olo

mb

iaG

erm

an

yE

sto

nia

Sp

ain

Fin

lan

dN

eth

erl

an

ds

Ro

ma

nia

Slo

ve

nia

Po

rtu

ga

l

2012 FDI RR Index¹Closed = 1; Open = 0

Notes: ¹ Incorporates restrictions up to September 2012. *Preliminary scores.

Ireland and Switzerland omitted to facilitate scaling

Israel

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

0.000 0.050 0.100 0.150 0.200 0.250 0.300 0.350 0.400 0.450

20

11

Inw

ard

FD

I Sto

cks

(% o

f GD

P)

2012 FDI RR Index (Closed = 1; Open = 0)

Sources: OECD Statistics, IMFand Worldbank.

Mo

re F

DI

More Open

Jerusalem Institute


Jerusalem Institute


Regulatory and business environment may dampen investment

Gap in Global Opportunity Index Components from mean for Industrial Countries

Jerusalem Institute


Jerusalem Institute


TSE exhibits relatively low liquidity TSE is 30th among exchange turnover ratios

0%

50%

100%

150%

200%

250%

NA

SD

AQ

She

nzh

en

Gre

Tai

Sau

di

Kore

a

IMK

B

Sha

ng

ha

i

NY

SE

Taiw

an

Ja

pa

n

De

uts

che

Spa

nis

h

BM

&F

BO

VE

SP

A

Austr

alia

n

TM

X G

roup

Lo

nd

on

Ja

pa

n

Oslo

Tha

iland

NA

SD

AQ

OM

X

NY

SE

(Eu

rope)

Bud

ap

est

Sw

iss

MIC

EX

/ R

TS

India

Ho

ng

Kon

g

Ath

en

s

Jo

ha

nne

sb

urg

Wa

rsa

w

Sin

gap

ore

Tel A

viv

Egyptia

n

Mala

ysia

Mexic

an

Wie

ner

Indo

ne

sia

Teh

ran

Phili

ppin

e

Co

lom

bia

San

tiag

o

Source: Milken Institute, 2013

Jerusalem Institute


Jerusalem Institute


TASE vs. other markets The rate of change in turnover and market value at TASE and in comparison groups

Source: World Federation Of Exchanges, Bank of Israel adaptations

December 2009-December 2012 (%)

Tel Aviv Stock Exchange

World Developed markets average

Emerging markets average

Average of similar stock markets average

Turnover 44- 18- 12- 33- 1-

Turnover normalized to market value

35- 26- 30- 29- 12-

Market value 14- 12 14 5 31

Jerusalem Institute


Jerusalem Institute


Market capitalization

351 545 577

24

248 261 376

837 604

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Sh

ekels

– B

illio

ns (

2012 P

rices)

Government Bonds Corporate Bonds Stock & Convertibles

MSCI

reclassification, 2010

Reforms to equalize capital

gains taxes Israel and

abroad, 2003

Source: Milken Institute, 2013

Jerusalem Institute


Jerusalem Institute


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) Israel GDP

1,870

Credit in the Banking

System

872 939

840

2020E

2011

1,165 1,160

Source: GDP and credit - economic department forecast. Yearly 8% increase of Long term saving (according to perennial average)

Billions

(NIS)

Billions

(NIS)

Billions

(NIS)

Jerusalem Institute


Jerusalem Institute


A sharp decrease in the activity of the most significant

market participants

5%

7%

9%

11%

13%

15%

17%

19%

21%

0

2

4

6

8

10

12

Local institutional investors Investments abroad VS Israeli Equities in total investment portfolio

Foreign investment funds Holdings of TASE equities

Bil

lio

ns

($)

Jerusalem Institute


Jerusalem Institute


Overseas investments – global trends

Source: BOI, Towers Watson, UBS.

63% 57% 54% 48% 45% 29% 24% 35

%

50%

1998 2011

Average of 6 benchmark

countries

Share of overseas investment as a % of total investment in equities by pension funds - 2011

Jerusalem Institute


Jerusalem Institute


0

100

200

300

400

500

600

700

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Billio

ns o

f N

IS (

2012)

Pri

ces

TASE Stock Market trading volume

Declines after flight of passive investors

MSCI Upgrade

Sources: TASE

Jerusalem Institute


Jerusalem Institute


Israel’s low free float in global perspective

0

10

20

30

40

50

60

70

80

90

100

S&P FTSE MIB Index DAX CAC TA25 TA25*

Percent

Source: TASE.

Jerusalem Institute


Jerusalem Institute


Highly concentrated stock market

Big ten firms (with Teva) = 30%

Othercompanies = 30%

Teva = 30%

Percent of total companies on TASE

Source: TASE.

Jerusalem Institute


Jerusalem Institute


Business groups' share of stock market capitalization

by country

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Masulis et. al. 2012; Sokolinski, 2012.

Jerusalem Institute


Jerusalem Institute


Investment Opportunities

• Folding layers of pyramids

• Real-financial separation

• Deleveraging

Jerusalem Institute


Jerusalem Institute


Competition Enhancement Committee

Recommendations

• Separation of real and financial holdings

• Flattening of pyramid structures

• Allotment of public assets

Jerusalem Institute


Jerusalem Institute


Market Performance: PE Ratio

Comparisons

Jerusalem Institute


Jerusalem Institute


Schematic elements of new platform

Jerusalem Institute


Jerusalem Institute


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

Jerusalem Institute


Jerusalem Institute


Evaluation of solutions by criteria

Documents

(Re)Inventing Israeli Capital Markets: Infrastructure for ...wink.globes.co.il/conference/2014/ibc2014/... · Milken Innovation Center Israel’s Economic Strategy: Leapfrogging Government