Israeli equity ETFs overdue on Asian bourses: Steven Schoenfeld, BlueStar Indexes

Steven Schoenfeld, chief investment officer of BlueStar Indexes.

Steven Schoenfeld, the chief investment officer of BlueStar Indexes, is bullish on the growth prospects that the privatisation of the Tel Aviv Stock Exchange (TASE), predicting greater connectivity between the Israeli and Asian capital markets such as Singapore, with an Israeli equity ETF on Singapore’s bourse being long overdue.

The privatisation of TASE is part of broader capital market reforms in Israel, whose financial system has been undergoing rapid reform-driven change, with accelerated financial deepening seeing a shift from banks to institutional investors and households.

These developments raise new challenges for Israel’s financial regulators and policy makers.

At this juncture, Schoenfeld observes that there has been an uptick in public listings on the TASE in recent quarters. PWC reported that tech exits in Israel totalled $7.44 billion in 2017, with ticket sizes averaging $106 million.

In an email exchange, he told this blog: “There actually has been an increase in IPO activity on the TASE, and a strong pipeline of potential IPOs for both TASE and foreign exchanges like Nasdaq, LSE, SGX, etc. There are also several initiatives to promote the investment in public technology companies underway in Israel, including incentives for new funds. BlueStar’s BIGITech Israel Technology Index is a key benchmark and investment vehicle within this trend.”

Credit: Bloomberg

With Israel generally perceived as a global technology centre due to high concentration of technology firms on its coastal plain — termed the Silicon Wadi—its equities market is often overlooked by foreign investors and faces a number of issues due to the unique structure of the TASE.

Weighing in on how the privatisation of TASE will impact its ETF marketplace and securities market as a whole , Schoenfeld opines: “BlueStar is optimistic about the potential for Israel’s capital markets and ETF marketplace due to several key reforms underway, of which the privatisation of the TASE is one of them.”

Credit: Bloomberg

“In addition, the entire index fund and ETF market is moving to a new regulatory framework later this year, which will foster completion and product innovation.”

While the Singapore Exchange (SGX), which aspires to establish themselves as a global technology centre, was reportedly in the running to acquire a controlling stake in the TASE, it appears that such an investment is unlikely at this point.

Investment fund Manikay Partners LLC acquired a 19.9% stake in the TASE in a deal described as a “long-term strategic partnership” that valued the bourse at $157 million, with Schoenfeld noting that a lack of interest by foreign exchanges in TASE was disappointing. The TASE is planning a public float in Q4 2018, with a sale of 30% stake valued at about $200 million.

However, Schoenfeld told Venture Views: “Even though it does not appear that the SGX will invest in the TASE at this point, there is still substantial economic and technological cooperation between Israel and Singapore, and SGX continues to promote itself as a listing venue for Israeli companies.”

“Right now, just two Israeli companies are listed on SGX — Sarine Technologies and Trendlines Group — but the potential for additional listings, especially for Israeli companies with major business activities in Asia.”

Currently, the Australian Securities Exchange (ASX) — which competes with the SGX for tech listings — has emerged as a major listing destination for Israeli technology firms, with 16 Israeli firms currently listed on the bourse, with more expected to float on the ASX this year.

Given developments such as a a stock connect with the Bursa Malaysia, which is is slated to be operational by end-2018 and its co-listing agreement with the Nasdaq, Schoenfeld anticipates that the SGX willmaintain a robust dialogue with TASE officials and the new owners to explore areas of mutual benefit.”

He also highlights the dual-listing accord between the Monetary Authority of Singapore and the Israeli Securities Authority earlier this year, which he expects to “encourage prospective IPOs on SGX and dual-listing with TASE”.

In 2000, TASE launched a dual-listing program for Israeli companies traded in New York and London. With more than 60 Israeli firms dual-listing since then, this development is synchronised with a growing interest among Israeli companies to list in Asia because of business ties, coupled with a perception that Hong Kong, Singapore and Toronto are attractive markets to raise capital.

Given the nature of the TASE deal, Schoenfeld highlights: “The current structure of the deal, as announced, has an ‘Asian angle’ in that the lead investor, Manikay Partners was deeply involved in the privatisation of the Australian exchange. And based on media reports, it has existing investments in SGX and HKEx.”

“I am confident that the new owners of the TASE will encourage the Israeli exchange to ‘go global’ and seek partnerships and dual-listings with SGX, ASX and HKEX, as well as encourage the development of Israel-focused funds and ETFs for Asian investors.”

Given the growth opportunity in the domain of exchange-traded funds (ETFs) and their capacity to diversify portfolios and distribute capital, such instruments are of particular interests to a bourse like the SGX, as well as capital market players in Singapore and Hong Kong.

Performance of S&P 500 Index (Black)compared to BlueStar Global Technology Index (Blue). Data from WSJ Quotes.

The SGX only commenced with its ETF push in 2015, following regulatory reforms to boost its securities market, waiving fees for institutional investor and boosting its investor education efforts. While still in its infancy, the ETF market in the city-state has significant growth potential.

Commenting on the strength of Israel’s ETF cluster compared to Singapore and the key lessons that the city-state could draw upon, Schoenfeld explained: “Israel’s index fund and Exchange Traded Note (ETN) market is substantially larger than SGX’s, and will likely grow even larger, with the previously-mentioned regulatory reform.”

“ I believe that SGX and MAS should encourage greater ETF use by investing institutions (Israeli pension funds and insurance companies are major users of ETFs). And on a self-serving note, I believe that it is long-overdue for there to be an Israeli equity ETF (hopefully tracking one of BlueStar’s indexes) listed on SGX, so that Singaporean and Asian investors can access a portfolio of Israeli public companies during Asian hours.”

See:

Crypto-tokens & ICOs to be further integrated into financial ecosystem amid strengthening of PE/VC & securities market: Monetary Authority of Singapore

Exit events crucial for capital recycling in ASEAN venture ecosystem: Chris Tran, North Ridge Partners

Digital economy enterprises can’t approach ASEAN as a single market: Charif El-Ansari

SGX needs international partnerships to remain competitive: Alex Frino, University of Wollongong