Israel’s stock exchange can benefit by co-listing Indian securities

Did you know over half of India’s large companies delivered a 10%+ Return on Equity in each of the 5 years upto 2016? It scored the highest out of a sample of 27 emerging/frontier markets and 5 developed markets (including Israel). Did you know over half of India’s large companies delivered a positive CAGR in profits over this 5-year period – one of the only 8 countries out of these 32 to do so? Last, did you know over 90% of India’s large companies were profitable in 2016 – again one of the only 8 countries out of the 32 to be so? Large companies here refer to the Top-200 listed companies by 2016 market cap. They have better access to resources and so are better proxies as market performers.

These data highlight the breadth, consistency and buoyancy of relative market performance in India, one reason for foreign investors to take deeper interest. But many investors in Israel would have been unaware of this, since the investor interest in its domestic real estate, VC-funded start-ups and US markets far overshadows the potential interest in foreign securities. But other countries did notice. Singapore houses many portfolio asset managers who run India funds. The Singapore exchange even co-listed an index future of the Indian benchmark (NSE Nifty) some time ago, and traded volumes of this SGX Nifty recently hit as high as 52% of all Nifty future volumes across exchanges. This journey to reach 52% has been extremely lucrative for it.

Apart from performance, there are other reasons making Indian securities worth considering. In sector-concentration, the contribution of the 3 largest sectors to the profit-pool of its Top-200 companies was 56% in 2016. Most peers had a higher concentration. That indicates the impact on profit-composition due to a focus on only a few sectors of competitive advantage. If a risk were to hit the large sectors, India would fare relatively better. Israel’s concentration was 69%, which increased from 40% in the last 5-years due to recent traction in its energy and real estate scrips. But India’s concentration held at 56%, showing other sectors also saw healthy growth in profits over the same period. Second, it was one of the more productive markets. If one breaks down Return on Equity with DuPont method, then India was one of the 11 markets of these 32 that notched a high asset turnover ratio (productivity) in 2016, higher even than Israel. Last, the average size of its companies is by no means small. If one looks at the average profit of the largest 200 companies, India ranks just after the developed markets and emerging markets like China, Korea and Russia. The average size of an Indian Top-200 company is 6X that of Israel. India is making policy reforms, thus expanding its organised market and the addressable consumer base. The volume-driven market opportunity that India offers is unparalled elsewhere, except China. Companies participating in this formalisation of the economy are set to ride a growth-curve, as would their investors. All these factors can nudge more foreign investors, say from Israel, to consider investing in Indian securities. As it is, foreign investors already hold ~25% of India’s market cap, amongst the highest in the emerging market universe.

But this is not the only reason for Israel’s exchange to consider co-listing Indian securities. Both nations have entered several partnerships recently, but those are mostly in security and technology. But sectors like investments also deserve a look. Volumes in Tel Aviv stock exchange are relatively less than developed market peers. Most of the investor interest to list its hi-tech firms and start-ups is concentrated on the US exchanges like Nasdaq, apart from staying private with PE/VC funds. Hence, Israel’s total volume/market cap ratio was less than ~40%, while it close to, or more than, 100% in USA, Germany and Canada. It was even lower than developing market exchanges like India, China, Thailand, Korea, South Africa, Brazil and Turkey. Israel’s market cap/GDP ratio (of Top-200 companies) at ~50% was lower than its developed market peers, and even developing markets like India, Thailand, Philippines, Morocco, Chile, South Africa, Korea, and Saudi Arabia. New listings often help evince fresh investor interest in the stock market. But if Israeli companies are hesitant to list in large numbers due to other priorities, co-listing of Indian securities might help generate that fresh interest at the Tel Aviv stock exchange. Foreign securities have proved lucrative for many exchanges, not just in SGX. As per WFE, they made up ~12% of Nasdaq’s cash volumes in 2016, ~7% in Johannesburg, ~6% in NYSE and ~13% in Oslo. If Israel’s domestic real estate prices peak or the hit-rate of its listed start-ups dips, then foreign stocks like co-listed Indian securities may be an opportune avenue for Israeli investors to consider for earning decent yields.

Israel has a small-population and high per-capita income. The commercial-acumen of its people has created several successful businesses (and resultant business income). While it has the high Gini-coefficient amongst OECD nations, its mid-30s score ranks better than the broader-set of countries globally. All these combine into a wide catchment-base of high income and high wealth, something stock market securities cannot ignore. This is a compelling reason for Indian companies to think about co-listing in Israel, just like they co-listed on US and UK exchanges in the past.

In the end, while Israel and India need to build awareness of this opportunity, the bigger need is to build awareness amongst the societies of each other. That is one reason why India-Israeli business linkages still seem muted in comparison to the scale of outreach their governments have done. Co-listing of Indian securities would not only benefit the market participants, but may also help in a deeper understanding of the business-sectors – a win for long-term engagements!

[Data from IMF, WFE, NSE and Bloomberg]