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Israeli Capital Markets: Challenges, Return of Equity Flows, and Opportunities

Equities: 2013 Capital Markets Update


STEVEN SCHOENFELD: Israel has had a very positive second half of 2013.  The stock market has had strong momentum, particularly in the third quarter, and into the fourth quarter.  The year may end with a gain of over 20%, based on the BlueStar Israel Global Index [BLSNTR].  Volumes have recovered substantially on the Tel Aviv Stock Exchange and October saw one of the highest months in trading activity in the past five years. Equity mutual fund flows, primarily from domestic investors, and foreign portfolio flows, which had been absent for quite a while, have come surging back into the market.


Tel Aviv Stock Exchange in 2013


SCHOENFELD: The Tel Aviv Stock Exchange started the year with strong challenges.  There was a lot of criticism over the management of the Tel Aviv Stock Exchange, which led to volumes of the exchange being down and a number of major companies leaving the exchange.  If companies were dually listed on both exchanges, they just moved to their U.S. listing, which is one of the reasons why the BlueStar Israel Global Index includes Israeli stocks that are listed in Israel, U.S., and London.


At the end of October, after a very long search, the Tel Aviv Stock Exchange named a new CEO.  His name is Yossi Beinart and he has strong international and institutional experience.  There's a lot of optimism about what he's going to bring to the exchange.  The Israel Securities Authority, the capital market's main regulator, is pursuing a very aggressive set of reforms for the capital markets, and the chairman, Professor Shmuel Hauser, is a large proponent.


2013 has been an incredible year for the Israeli capital markets.  It was a record year for M&A activity, particularly acquisitions of Israeli startups and medium-size companies by foreign companies, as well as entry into the capital markets through IPOs and secondaries of major Israeli companies.  Most notably, Wix went public on the NASDAQ in November.  The company Plus500 went public on the London Stock Exchange, and there are still additional IPOs and dual listings in the pipeline for 2014.


There were a number of factors that drove the rally in 2013 for Israeli equities.  Foreign investors have returned in force to the market.  Local investors have started reinvesting in the market: both retail investors and Israeli institutions, which had been very focused on investing abroad. Now that the market is in rally mode, they're investing in the local market. There have also been specific companies stories that have attracted investors both to Israeli stocks listed in Tel Aviv, as well as Israeli stocks listed abroad.


BlueStar Israel Global Index


SCHOENFELD: The BlueStar Israel Global Index gained substantially during the second half of 2013.  It significantly outperformed the MSCI Capped Index for Israel and other global indexes for Israel, particularly because of the BIGI’s capping and diversification of major stocks; it also included a number of significant stocks that are listed outside of Israel that had substantial gains.  For example, Perrigo, Stratasys, and Check Point all performed well. In addition, a company like Teva, which is a fantastic blue-chip company, has been in a rut over the last six months, and because the BlueStar Israel Global Index caps its weight at 12.5%, it impacted the index relatively less.


The research we do at BlueStar looks at both valuations and technical patterns in the market. Even though the BlueStar Israel Global Index has had a very strong rally and could be due for a pause, we expect further highs in 2014.  I believe the valuations are reasonable, and the political risk weight on the market is slowly being lifted and may continue to dissipate, particularly if there's movement toward an Israeli-Palestinian agreement and if the deal or the provisional deal with Iran holds over the next five to six months.

Israel as a Technology Startup Nation


Israel is well-known for being the startup nation.  The tech sector in Israel, which includes information technology, software, app development, and hardware, has had a very good second half of the year, just as tech companies in the U.S. have had a good last half of the year.  Because the BlueStar Israel Global Index includes what I believe to be the appropriate weight in technology, approximately 30% of the Index, it has benefited.  Whether it's a 3D printing company like Stratasys or an internet security company like Check Point, all of these companies are starting to hit their stride and are recognized in the market. We think that bodes well for the future.


Financials as a Leading Indicator


The financial sector in Israel is actually quite broad and diversified because the two dominant banks, Bank Leumi and Bank Hapoalim, have exposure to almost every sector in the economy.  Other financial companies have a holding company structure, which gives them exposure to everything from healthcare to technology.  As Israel's economy delivered strong GDP growth, the financial sector tended to be a leading indicator.  Because we expect continued economic growth in Israel, the financial sector may potentially benefit by delivering returns to investors.


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IMPORTANT DISCLOSURE


The views and opinions expressed are those of the speaker and are current as of the video's posting date. Video commentaries are general in nature and should not be construed as investment advice. Opinions are subject to change with market conditions.   Any discussion of specific securities mentioned in the video commentaries is neither an offer to sell nor a solicitation to buy these securities. All indices mentioned are measures of common market sectors and performance. It is not possible to invest directly in an index.  All performance information is historical and is not a guarantee of future results. For more information about Van Eck Funds, Market Vectors ETFs or fund performance, visit vaneck.com.

Please note that Van Eck Securities Corporation offers investment products that invest in the asset class(es) included in this video (Market Vectors Israel ETF).


 

Important disclosure for Israel ETF investors:  Investors should be willing to accept a high degree of volatility and the potential of significant loss. The Fund is subject to elevated risks, including those associated with investments in foreign securities, in particular Israeli issuers, which include, among others, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Israel’s relations with the Palestinian Authority and certain neighboring countries such as Lebanon, Syria and Iran, among others, have at times been strained due to territorial disputes, historical animosities or security concerns, which may cause uncertainty in the Israeli markets and adversely affect the overall economy. Furthermore, Israel’s economy is heavily dependent upon trade relationships with key counter parties around the world. Any reduction in these trade flows may have an adverse impact on the Fund’s investments. In addition, companies with medium and small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies and tend to have narrower product lines, fewer financial resources, less management depth and experience and less competitive strength. Finally, the Fund is classified as a “non-diversified” investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). Therefore, the Fund may invest a relatively high percentage of its assets in a smaller number of issuers or may invest a larger proportion of its assets in a single company.As a result, the gains and losses on a single investment may have a greater impact on the Fund’s NAV and may make the Fund more volatile than more diversified funds. The Fund may loan its securities, which may subject it to additional credit and counterparty risk.


The “BlueStar Israel Global Index” is the exclusive property and a trademark of BlueStar Global Investors LLC and has been licensed for use for certain purposes by Van Eck Associates Corporation for Market Vectors Israel ETF.  The ETF is not sponsored, endorsed, sold or promoted by BlueStar Global Investors LLC and BlueStar Global Investors LLC makes no representation regarding the advisability of trading in such products(s).

MSCI Israel Capped Investable Market Index is designed to measure the performance of the large, mid, and small cap segments of the Israeli market, consisting of stocks traded on the Tel Aviv Stock Exchange. The iShares MSCI Israel Capped ETF (EIS) seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of this index.


As of December 31, 2013, the individual stocks mentioned in this commentary had the following allocation in the Market Vectors Israel ETF.  Perrigo (9.72% of the portfolio); Stratasys (3.70%); Check Point (7.02%); Teva (12.13%); Bank Leumi (4.04%); Bank Hapoalim (4.20%).


Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 888.MKT.VCTR or visit marketvectors.com/isra. Please read the prospectus and summary prospectus carefully before investing.


No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Van Eck Securities Corporation. © 2014 Van Eck Securities Corporation.

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