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The Israeli Stock Market's Surprising Stability

Israel, under threat of war from its neighbors since its founding in 1948, produced better risk-adjusted returns than all other developed stock markets in the past decade. The country’s main stock index, the Tel Aviv TA-25, returned 161 percent, including dividends, over the 10 years through Feb. 17, the third-best performance among developed markets after Norway’s OBX Index and Hong Kong’s Hang Seng. After adjusting for market volatility, Israel came out on top among the 24 developed nations, with a 7.6 percent risk-adjusted return. Hong Kong was second at 6.7 percent, Norway third at 6.5 percent.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period of time, increasing the potential for unexpected losses compared with a security whose price moves at a steadier rate.

While Oslo’s index produced the highest return, its volatility was 35 percent greater than that of Israel’s TA-25. Statoil (STO), the world’s seventh-largest oil exporter, comprises 25 percent of Norway’s gauge, making the market susceptible to changes in oil prices. The TA-25’s biggest members are Bank Leumi Le-Israel (LUMI:IT) and Teva Pharmaceutical Industries (TEVA), each with an 11 percent share.

Investors’ enthusiasm for fast-growing developing economies has given Israel a boost, says Michael Shaoul, chairman of New York-based Marketfield Asset Management. Israel was part of the MSCI Emerging Markets Index until 2010, when MSCI shifted the country to its developed markets index. “It doesn’t matter how MSCI categorizes Israel,” Shaoul says. “It still trades with the emerging-market complex.”

Israeli companies generate revenue around the world, helping the market deliver steady returns. Exports make up about 40 percent of the economy, and high-tech industry accounts for 47 percent of manufactured overseas shipments, according to the central bureau of statistics. Teva, the world’s largest maker of generic drugs, and Israel Chemicals (ICL:IT), which harvests chemicals from the Dead Sea, account for more than 20 percent of the TA-25 and get less than 6 percent of their revenue from Israel.

Also helping to smooth returns: Israeli companies tend to pay higher dividends than those in other developed markets. The dividend yield of the TA-25 Index is 3.49 percent, compared with a 2.63 percent average for companies on the MSCI World Index of developed markets. “It will take a lot more than a simple military action to keep the stock exchange from working,” says Gilad Alper, an analyst at Excellence Nessuah Investment House in Tel Aviv. “The last full-scale war that we had here that involved huge parts of the economy was in 1973. Since then, everything has been relatively small.”

The bottom line: While it ranks third with a 161 percent return for the past 10 years, Israel’s market comes out on top after adjusting for volatility.

Barak Harif is a reporter for Bloomberg News in New York.

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