Israel to be attractive developed market-analysts

* Upgrade may affect short-term passive inflows

* Handful of Israeli companies likely to benefit most

* Investors say will stay with Israeli stocks

By Ari Rabinovitch

TEL AVIV, May 14 (BestGrowthStock) – Israel will be an attractive
investment after its upgrade from an emerging to a developed
market this month in the MSCI Index, analysts say.

Deutsche Bank (DBKGn.DE: ) said this week that although Israel
will be alongside the world’s richest economies, its growth
characteristics will keep more in line with an emerging market.

“(Israel) can offer active developed market investors the
opportunity to enjoy emerging style growth and performance
without having to invest off-index,” the bank said in a report.

Index compiler MSCI announced last June it would include
Israel in its World Index (.MIWD00000PUS: ) and its EAFE Index,
the third such upgrade in its history.

When the May 27 reclassification takes effect, passive
investors in emerging markets will have to sell Israel holdings.
It may take time for developed market funds to take their place.

“The Israeli economy is in relatively good shape. For a
developed market investor, Israel would be quite an attractive
place,” said Andrew Brown, an investment manager at British firm
Aberdeen (ADN.L: ) whose emerging market fund has about $700
million in Israeli companies.

“These stocks are of relatively good value,” he told
Reuters. “We will not rush to sell them.”

Foreign investors surveyed by Thomson Reuters Extel in March
said the biggest challenge to the Israeli market would be the
shift from comprising about three percent of MSCI’s emerging
markets index to some 0.4 percent of its developed market index.

Fidelity International’s Nick Price, portfolio manager of
the Emerging Europe Middle East and Africa Fund, said the switch
will not have any effect on his fund because of Israel’s size.

“I will stay with stocks that I like and I believe that most
people will do the same,” he said.


A Citigroup report said $2.8 billion in passive outflows
were expected from Israeli stocks with the change — but
eventually would be more than offset by inflows of $3.6 billion.

Foreign investors already hold nearly 30 percent of Israeli
equities, mostly in top companies like Teva Pharmaceutical
Industries (TEVA.TA: ) (TEVA.O: ), Israel Chemicals (ICL.TA: ), Bezeq
Israel Telecom (BEZQ.TA: ) and the largest banks, Leumi (LUMI.TA: )
and Hapoalim (POLI.TA: ).

UBS and Merrill Lynch also view the move as a short-term
negative with a more positive long term.

The Tel Aviv 25 index (0#.TA25: ) hit an all-time high last
month of 1,237.85 points, buoyed by strong economic growth. It
has eased back to 1,162 with the global decline in stocks.

The country recovered relatively quickly from the global
crisis, its economy expanding at an annualised 4.8 percent rate
in the fourth quarter and 0.7 percent for all of 2009. The
central bank predicts growth of 3.7 percent in 2010.

Israel was also invited to join the Organisation for
Economic Cooperation and Development (OECD) this month.

The Bank of Israel said that while there is a chance of an
ebb in passive inflows, in previous upgrades there was no
evidence of a significant drop in the volume of investment.

Stock Analysis

(Editing by David Cowell)

Israel to be attractive developed market-analysts