Why Investing In Indian Securities Can Revive Israel’s Dying Economy

Posted by Sourajit Aiyer in Business and Economy, GlobeScope
March 20, 2018

Did you know that over half of India’s large companies delivered a 10%+ Return on Equity in each of the five years leading up to 2016? It scored the highest out of a sample of 27 emerging/frontier markets and five developed markets (including Israel).

Did you know over half of India’s large companies delivered a positive compound annual growth rate (CAGR) in profits over this 5-year period – one of the only eight countries out of these 32 to do so?

Lastly, did you know that over 90% of India’s large companies were profitable in 2016 – again one of the only eight countries out of the 32 to be so? Large companies here refer to the top 200 listed companies by the 2016 market cap. They have better access to resources and are, therefore, better proxies as market performers.

These data highlight the breadth, consistency and buoyancy of the relative market performance in India – one reason why foreign investors should take a deeper interest here. But many investors in Israel would have been unaware of this, since the investor interest in its domestic real estate, venture capital (VC)-funded startups and US markets far overshadows the potential interest in foreign securities.

But other countries have noticed this. For instance, Singapore houses many portfolio asset managers who run India funds. Some time ago, the Singapore exchange even said that it would co-list an index of future products of the Indian benchmark (NSE Nifty) and trade volumes of this. The SGX Nifty recently hit as high as 52% of all Nifty future volumes across exchanges. This journey to reach 52% has been extremely lucrative.

Apart from performance, there are other reasons why they should consider investing in Indian securities. Going by sector-concentration, the contribution of the three largest sectors to the profit-pool of its top-200 companies was 56% in 2016. Most of its 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 five years leading to 2016, due to the recent traction in its energy and real estate scrips. But India’s concentration held at 56%, showing that other sectors also saw a healthy growth in profits over the same period.

Second, it was one of the more productive markets. If one breaks down the Return on Equity with the DuPont method, then India was one of the 11 markets of these 32 that notched a high asset turnover ratio (productivity) in 2016, higher than even Israel’s.

Lastly, 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 six times 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 unparalleled elsewhere, except in 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 are not the only reasons for Israel’s exchange to consider co-listing Indian securities. Both nations have entered into several partnerships recently, but those are mostly in security and technology. But sectors like investments also deserve a look. Volumes in the Tel Aviv Stock Exchange are relatively less than the developed market peers. Most of the investor-interest to list its hi-tech firms and startups 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’s close to, or more than, 100% in USA, Germany and Canada. It was even lower than in 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 the World Federation of Exchanges (WFE), they made up ~12% of NASDAQ’s cash volumes in 2016, ~7% in Johannesburg, ~6% in the New York Stock Exchange (NYSE) and ~13% in Oslo. If Israel’s domestic real estate prices peak or the hit-rate of its listed startups 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 a high per-capita income. The commercial acumen of its people has created several successful businesses (and resultant business income). While it has a high Gini-coefficient among 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 in 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 in each other’s societies. That is one reason why India-Israel 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]

This article was originally published here.

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