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Mar 31, 2001

Mid-east summit

The first Israeli IR conference

Emerging or developed? That used to be a straightforward question with just one answer for any given country. Not any more. The transition from a developing economy to a developed one is more like crossing an unmarked border in the fog. And just where Israel is on that path became a topic of debate at our first conference on IR in a global market, held in Tel Aviv at the end of January.

I went to the conference assuming that Israel had completed the emerging-to-emerged market odyssey. With more than 130 of its companies listed on Nasdaq(second only to Canada for non-US listings) and 4,000 high-tech companies giving it the reputation of the Silicon Valley outside Silicon Valley, Israel is no economic backwater.

As recently as last summer, when it looked as though the Middle East peace process was still taking hold, index compilers Morgan Stanley Capital International (MSCI) and the IFC appeared to be ready to move the country to the developed ranks. But recent turmoil has kept Israel emerging, and many local companies and market intermediaries are happy to keep it that way.

'We're an emerging market,' proclaims Haim Israel, research analyst with Nessuah Zannex Securities who spoke at our conference. 'And according to the recent talks I've had with our global investors, we will be continue to be an emerging market.' That's strange, because if you look at the criteria MSCI demands of a developed market, Israel surpasses them all with, for example, per capita GDP over $17,000. 'Yet investors still consider Israel to be an emerging market, mostly because of political events here. There's a lot of uncertainty regarding Israel and the political situation in the Middle East.'

This analyst insists Israel is 'far better off' sticking with the status quo, even though there's a much greater weight of institutional capital behind the global index compared to the emerging markets one. As one IRO at the conference argued, wouldn't Israel's companies benefit from investment by big globally indexed players instead of just emerging markets investors?

Not so, answers Haim Israel. Currently the country accounts for around 3 percent of MSCI's emerging markets index. But if it was switched to MSCI's global developed markets grouping, it would be about 0.4 percent - a much smaller fish. 'Although there's a lot more money in global funds, most fund managers wouldn't contribute the time or the effort to Israel if it was in the global index. They don't want to waste their efforts on only 0.4 percent of the index. They would buy the companies in the index and that's it - they wouldn't pay any attention to them or to other Israeli companies.'

Big cog, small wheel

'Israel is currently a big cog in a small wheel,' sums up Robert Kandel, director of Tempest Consultants and an attendee at the conference. 'That makes it a must to stop off at and to look at. If it was transferred into a global index then its weighting would be less and the number of companies in the index would be less, which means that Israeli companies - especially some of the old economy stocks - might be neglected.'

Still, the question of emerging versus developed is practically irrelevant to Israel's 'big gorillas' such as Teva, Checkpoint and Comverse, says the Nessuah Zannex analyst. 'They're aiming to be global players, and a lot of global sector funds already invest heavily in them. So it doesn't matter to them if Israel is considered developed or emerging. They're just global.'

For some companies, to be Israeli is to be an attractive investment opportunity. 'The upside is that the US in particular and to some extent the UK, are very culturally open to what Israeli companies have to offer,' says Simon Brocklebank-Fowler, managing partner of Cubitt Consulting and another speaker at the conference. 'Whether it's successful privatizations like Bank Hapoalim or classic high-tech stocks like Geo Interactive, which has had its problems but also had a good ride, the Israel recognition is the essence of their offering.'

Brocklebank-Fowler compares Israel to European countries and finds its GDP growth rates 'to die for'. He adds, 'It has emerging market characteristics but with a first world infrastructure and business culture. That makes it a very interesting place.'

For this observer, Israel stands with Sweden and Germany as the three 'European theater' growth countries which are internationally competitive at a technology level and which have substantial requirements for international capital, particularly out of the US and the UK. In another sense, Israel's most obvious peer is South Africa, though Israel is more attractive in terms of fundamental investment characteristics. 'South Africa has falling per capita GDP, which is pretty horrifying, and an infrastructure clearly under threat from its demographics. Israel is quite the opposite, and has a great track record of converting immigrant labor into a high value-added resource,' he says.

Cubitt is banking on Israel despite violence in the region, acquiring 25 percent of Tel Aviv's IR Consulting to create Cubitt IR Consulting with the goal of offering Israeli companies access to a 'triangle' of capital encompassing New York and London. 'Our view as an investor in the country is that the political uncertainties can be lived with, and that the quality of pure technology and academic research more than makes up for the political risk.'

That 'political risk' was another hot topic at the conference. Indeed two US-based conference sponsors pulled out after the State Department's recent warning to Americans traveling to Israel. A keynote speech on the subject by Dani Wassner of the investment promotion center at the Ministry of Industry and Trade held the audience rapt.

Crisis in perception

Wassner, an Australian transplant, painted a picture of a fundamentally strong economy suffering from a crisis in perception. For example, Israelis are traveling to meet investors abroad instead of hosting visits, while many high-tech and investment conferences in Israel have been postponed because foreigners are afraid to visit. The fourth quarter of 2000 saw tourism drop to 54 percent lower than the same period the year before.

However, Wassner had plenty to say to try to counterbalance the misperception. 'History has shown that the path to peace has many upswings and downswings,' he comments. 'Despite this, the Israeli economy has continued to grow and expand even during periods of conflict.' He insists that there is no reason to believe that the current political problems in the region will significantly affect Israeli industry.

It's now up to Israeli IROs to sell their country as much as their own companies to doubtful western investors, and Wassner provided their talking points: Israeli businesses are operating at full capacity with 100 percent manpower; ports, communications and other infrastructure are operating normally, unaffected by disturbances in the Palestinian areas; and overall, Palestinians comprise only 1 percent of the Israeli industrial workforce, while the high-tech sector is not affected by the Palestinian labor shortage.

Wassner also pulled out some nuggets from Wall Street research to support his positive view: 'As far as Israeli technology is concerned, the security situation has not had special impact... R&D activity, which is mostly based in Israel, is not affected by events because R&D centers are located... far from the flashpoints,' Goldman Sachs stated in October 2000. Also in October, rating agency Fitch reaffirmed Israel's credit rating and concluded that 'under a reasonable worse case scenario, the crisis is not likely to fundamentally derail the performance of the Israeli economy.' In December Fitch again affirmed Israel's rating and cited its 'dynamic and diversified economy combined with its democratic values.'

Of course there have been negative effects from domestic political instability as well as the Intifada, but they appear to be minimal. For example, the Bank of Israel estimates that the disturbances have resulted in a one-time cost to the economy of around 1 percent of GDP. But that still leaves a respectable 5.9 percent GDP growth for 2000.

Finally, Wassner insists, 'The Israeli economy is mature, stable and strong. Barring an unlikely serious deterioration of the situation, the effects on the economy will be relatively mild and should not affect fundamentals.'

IR prowess

The conference gave many attendees the chance to gauge IR's development in Israel. 'If you take the larger companies - be they old economy or new - the level of IR is extremely impressive,' says Tempest's Kandel. Many companies he has visited are 'completely on top of the situation.' This IR prowess, he says, is due to Israeli companies quickly coming to grips with analysts' tremendous information demands over the last few years. 'The result is that companies have woken up to what IR is really all about.'

Brocklebank-Fowler sees 'a growing recognition among the mid and smaller caps, which are historically very budget sensitive and don't want to spend money unless they get a clear, visible return. They're recognizing that IR is a strategic long-term investment which they can't afford not to have.'

As for the commentator who is on the receiving end of IR, security analyst Haim Israel, he's positive too: 'In the past we saw an advertising approach to IR; now we're getting more added value. We're seeing major improvements as Israeli IROs learn from the IR departments at the bigger companies like Teva and Checkpoint. These global players have very efficient IR departments which know how to work with analysts and provide them with more information.'

Lest Israeli IROs get complacent, though, Haim Israel concludes that while Israeli IR is improving, there is 'a long way to go.' They would do well to take that as encouragement, not criticism.

The TASE takes off
The Tel Aviv Stock Exchange’s chairman, Yair Orgler, took advantage of speaking at our Tel Aviv conference to launch a new technology index with the 20 largest of the 55 companies currently in the Tel-Tech index. Newly dual-listed companies are expected to play strong roles in the new index, along with longer-standing names like Nice Systems and Formula Systems.
Orgler went on to make encouraging noises about the new dual-listing process, which has seen eight US-listed Israeli companies listing on the TASE since the law took effect in October (see Zion bound, February 2001). ‘It’s certainly been a success so far,’ reports TASE spokesperson Ofer Simchony. ‘Most of these companies have seen substantially larger trading volumes and their share prices have mostly risen.’ For example, as of late February Blue Square’s volume increased by more than 450 percent, Scitex by 70 percent, Tower Semiconductors by 57 percent and Metalink by 46 percent.
Meanwhile, the TASE is taking a proactive stance towards its listed companies’ investor relations. It is planning a half-day conference for international investors in London in the early summer, with representatives of various TASE-listed companies as well as top Israeli financial officials speaking at it. ‘The TASE management will present the market’s growth potential, with an emphasis on dual listing and privatization,’ adds Simchony.

Depository receipts
Rights issues
The issue of ADR investor voting rights is in the spotlight again after a dispute erupted between oil giant BP and a group of American SRI (socially responsible investing) fund managers. The US investors are trying to place a shareholder resolution at BP’s upcoming annual meeting to halt plans to drill along the Alaskan coastline. But BP is refusing to allow ADR investors to sponsor resolutions without the support its nominee, Morgan Guaranty. ADR investors believe their shares should have the same rights as London-listed shares. Led by Walden Asset Management, the investors have attracted support from such sources as TIAA-Cref and Greenpeace.

Best of the best
It’s well known that DR issuers and investors are well served by the variety of internet-based DR news and analysis tools. But now, the web site of JP Morgan’s ADR group, is basking in the glory of being rated as the ‘best of the web’ by The judges were particularly impressed by’s layout. ‘The design is so clean and simple that a child could use it; yet the simplicity belies the amount of data packed in,’ they commented.

Petrobras prefer ADRs
Not satisfied with launching the largest ever ADR program by a Latin American company last year, Brazilian oil giant Petrobras has announced that it intends to offer level two ADRs representing preferred shares on the New York Stock Exchange. The preferred shares had previously been available as level one ADRs on the over-the-counter market, but now both types of Petrobras shares – common and preferred – are available on the NYSE. Though this offer is nowhere near the size of last summer’s $3.7 bn Petrobras level three ADR offering, the decision to switch its preferred stock ADRs to a level two program illustrates the emergence of New York as the principle center for Latin American stocks.