After a wait of about six months, MSCI Barra, which administers the global MSCI indices, will decide at midnight tonight, Israel time, whether to upgrade Israel from "emerging market" to "developed market" status. If a positive decision is made, it will come into force in November. The expectations on the market are that MSCI will upgrade Israel, and there will be considerable surprise if the decision goes the other way.
If the upgrade takes place, the Israeli economy will have won recognition of its robustness, but market players would be willing to forego the honor, because the consequences of the move are not expected to be positive.
"If it is decided to upgrade Israel, it will be included in three MSCI indices: MSCI World, MSCI EAFE, and the Kokusai Index," says Haim Israel, head research at Bank of America-Merrill Lynch in Israel.
According to market estimates, an upgrade for Israel from emerging market to developed market status will lead to foreign investors pulling money out of Israel, which is liable to result in a fall in stock market prices and to a weakening of the shekel against the US dollar. It is estimated that foreign investors will withdraw about $2 billion, because of changes that they will have to make in their portfolios. The main selling pressure will be on the major stocks that foreign investors focus on, such as Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Israel Chemicals Ltd. (TASE: ICL), Bank Hapoalim (LSE: BKHD; TASE: POLI), Leumi(, Bezeq (TASE: BZEQ), and MA Industries (Makhteshim Agan) (TASE: MAIN).
If an investment fund seeks exposure to emerging markets, in accordance with its investment policy, and has invested in Israel, among other places, for that purpose, then after the upgrade it will liquidate its holdings in Israel, since Israel will no longer be on the list of emerging markets. On the other hand, funds that invest in developed markets will also be able to invest in Israel, but Israel's weighting among the developed markets will be very small.
For every dollar invested in emerging markets, seven dollars are invested in developed markets. This sounds encouraging, but while Israel's weighting among emerging markets is 2.87%, its weighting among developed markets will be only 0.39%, so that the result will be an outflow of investment dollars.
This fear is exacerbated by Israel's political and security situation. Market sources say that while investors in emerging markets could not ignore Israel because of its weighting, investors in developed markets will be able to ignore Israel because of its insignificance among those markets, and it is likely that many investors will choose to do so because they seek to invest in countries they consider stable.
Published by Globes [online], Israel business news - www.globes.co.il - on June 15, 2009
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