Bravo, Economy!

Jun. 16, 2009
THE JERUSALEM POST
There was little hoopla locally yesterday, but there should have been: Israel's economy was upgraded by Morgan Stanley Capital Index (MSCI) from "emerging market" status and accorded recognition as a full-fledged "developed market."

This is no mean feat for a young country, a severely embattled one with few natural resources; one where virtually everything had to be started from scratch, often under the most adverse of conditions - including belligerence, boycotts and bad press.

MSCI is the world's leading provider of investment decision criteria for investment institutions. MSCI grading allows investors effective data-driven insights into various financial markets around the globe.

The MSCI did more than pat Israel on the back. In the Tel Aviv Stock Exchange, this is regarded as breaking the glass ceiling. Israel has been admitted to play in the exclusive and prestigious top league. This will surely make the competition tougher and require greater efforts and initiative, but it stands to attract investment opportunities incomparable to those that existed previously.

To put the reclassification into context, we need to realize that when it takes effect, in May 2010, Israel will rank 18th among the 24 developed market members, with a similar market weight to Denmark and Belgium and greater than Norway, Ireland, New Zealand, Portugal and Greece.

Further perspective is added by the fact that though South Korea's upgrading was mulled as well, it failed to make the grade this year and will be reevaluated in 2010, when Taiwan will also be up for possible promotion from emerging to developed market. Oil-rich United Arab Emirates, Qatar and Kuwait were being considered for advancement from their current "frontier market" status into the "emerging market" classification - which Israel has now outgrown. These Gulf States, however, it was decided, will remain where they are, their opulence notwithstanding.

WHY WAS Israel thus honored? Plainly, because we are doing well. With $134.5 billion in stock-market value, the TASE outdid most of its counterparts globally during the present crisis. The TA-25 Index of Tel Aviv shares surged 30 percent from January, beating 20 out of 23 developed markets tracked by MSCI.

Long-term, Israeli technology, pharmaceuticals and chemical companies are likely to be the reclassification's most outstanding beneficiaries. Yet in the short haul, trepidation surfaced. The very news that Israel is about to be sent to play in the big league contributed to significant TASE losses on Monday.

While the upgrade testifies to the strength of Israel's marketplace, there was safety in the big-frog-in-the-little-pond position. Now it is feared that some Israeli equities will become less attractive - a calculation which has indeed led to some sell-offs. Israeli securities might no longer be snapped up as thrift-store bargains, and Israel's overall share in the developed markets group will be considerably more modest than it was among the emerging (mostly Third World and East European) markets.

Funds that invest in emerging markets will probably be pulling out. Nonetheless, the cumulative effect of the negative aspects of the change will be far outweighed by the opening of new investment vistas.

The long-range outlook is far better than could have been expected just a few months back. Indeed, the Bank of Israel is expected to update its pessimistic predictions for 2009. There will still be negative growth, but not quite as bad as initially forecast.

Overall, the sense in the BOI is that the Israeli public isn't as gloomy as is common abroad, and that the global recession hasn't impacted Israel as drastically as it has other countries. Had Israel been in Europe, it would now rank fourth in growth on the continent.

THE acknowledgment of Israel as a developed market is more than just a merit badge. It carries with it real value in facilitating durable economic transactions with multinational partners. Israel's inclusion among the world's top markets is bound to alleviate investor anxieties, particularly during these times of acute risk-aversion.

We ought to congratulate ourselves on our tiny, beleaguered country's achievements, welcome the recognition these achievements are receiving from objective international assessors, and do our utmost to justify the confidence we inspire.