Bloomberg News

Israel to Begin Investing Foreign Reserves in U.S. Equities

December 13, 2011

(Updates with comments in 10th paragraph.)

Dec. 1 (Bloomberg) -- The Bank of Israel plans to invest hundreds of millions of dollars of its foreign reserves in U.S. equity index trackers in a pilot program beginning in the first quarter of 2012.

The bank, which hasn’t been deterred by global economic turmoil, has interviewed asset management firms and will decide on two, said Barry Topf, senior adviser to Governor Stanley Fischer. The firms will simultaneously invest in a chosen index, he said in an interview yesterday at the bank’s offices in Jerusalem.

“Whether or not this is a good time to begin or not - that’s obviously the major question,” said Topf. “We look at this as a long-term structural investment. We’re not trying to time the market.”

A small number of central banks have started investing part of their reserves in equities. About 9 percent of the foreign- exchange reserves of Switzerland’s central bank were invested in shares at the end of the third quarter, the Swiss bank said on its website.

“A lot of what we want to achieve is risk reduction in the portfolio and that’s a function of diversification,” Topf, 57, said. “We are convinced that adding equity will reduce the overall risk of reserves and give a better performance.”

Central banks slashed benchmark interest rates in the aftermath of the 2008 global financial crisis in an effort to shore up growth, resulting in a decline in yields on government bonds. U.S. 10-year note yields and German bunds hit a three- year low in September. In the past 12 months, the S&P index has risen 5.6 percent, and the Nasdaq Composite Index 4.9 percent.

Spreading Crisis

The Bank of Israel cut its benchmark interest rate for the second time in three months on Nov. 28 to cushion the economy from the effects of a European debt crisis that the central bank said is “becoming more severe and is spreading.” Foreign reserves hit a record high of $78.1 billion in August and have since declined to $76.9 billion.

“We’ve reduced interest rates,” Topf said. “We are not saying this is establishing a pattern.”

Still, the “downside risks” in terms of the world economy, trade and growth “definitely predominate,” said Topf, who holds a degree in history.

“The major central banks are clearly going to hold interest rates at extremely low levels for a long period of time,” Topf said. “This is the way things look going forward. It has to be stressed that the risks in Europe and the world economy are very apparent.”

Welcome Depreciation

While the initial investment will track “one of the most commonly used” and broadest U.S. equity indexes, the central bank expects to expand the program to other countries in the future, Topf said. Both managers will use the same index, so that the central bank will be able to compare their results, Topf said. No decision has been made on the exact amount that will be invested and the precise timing, he said.

The Bank of Israel had been buying foreign currency since March 2008, in an effort to moderate gains in the currency and help exporters compete. Purchases halted four months ago when the shekel began weakening against the dollar, sliding by more than 9 percent since then. The Israeli currency was trading at 3.7489 at 12:24 p.m. in Tel Aviv.

“The fact that there has been some depreciation of the shekel -- that is not an unwelcome development considering the world economy,” said Topf, who has been at the bank for 30 years.

Home Prices

The shekel exchange rate is consistent with the country’s economy, Topf said. “The fact that we haven’t intervened in a fairly long period -- after intervention was frequent -- this would indicate that obviously we don’t think the present rate is inconsistent with the fundamentals of the economy,” he said.

Israel’s unemployment rate rose in the third quarter for the first time in a year, climbing to 5.6 percent from 5.5 percent in the previous three months. The Organization for Economic Cooperation and Development this week cut its economic growth forecast for Israel for 2012 to 2.9 percent from its May estimate of 4.7 percent.

The economy grew an annualized 3.4 percent in the third quarter, slowing from 3.5 percent in the previous three months, the bureau said Nov. 16. Exports declined by an annualized 16.9 percent, after a 1.5 percent increase in the second quarter. About 40 percent of Israel’s gross domestic product is tied to exports, with Europe buying about one-third of the goods.

Israeli inflation slowed to 2.7 percent in October, within the government’s target of 1 percent to 3 percent for a second month. Home prices dropped 0.2 percent in August-September, the last period measured, the first decline since November-December 2008.

--With assistance from Klaus Wille in Zurich. Editors: Andrew J. Barden, Claudia Maedler

To contact the reporters on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net; Gwen Ackerman at gackerman@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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