Israel left out of Europe index by MSCI, dashing hopes for stock bonanza

After more than two months of waiting for the results of a global investor poll that could have led to a boon for the Israeli capital market, hopes were dashed late Monday when the MSCI opted to leave Israel out of a key regional index benchmark and retained its Mideast classification.

Citing the misalignment of trading days between Israel, where trading runs Sunday to Thursday, and European markets’ Monday-to-Friday schedule, US financial firm MSCI declined to add Israel to the Europe index but said it would “continue to engage market participants on the topic.”

MSCI, a global provider of equity, fixed income, and equity indexes for investors to track with the funds they manage, said the global survey, launched in December, revealed strong divisions regarding the appropriate regional classification of the MSCI Israel Index.

“The topic continues to pose a challenging question across global market participants. While many respondents to the recent consultation suggested that the MSCI Israel Index should be regionally reclassified to Europe, a significant portion of other respondents presented strong reasons against it,” the firm said in the announcement Monday.

Market participants who supported a regional reclassification argued that Israel’s economic indicators were more aligned with European nations and that keeping the MSCI Israel Index within the Middle East classification could lead to international institutional investors being less exposed to companies in Israel, according to MSCI.

Participants who were against the move said the trading schedule differences were a huge hindrance and further maintained that geographical proximity should be the primary driver when determining regional classification. They voiced concerns on the complexities “that may arise when departing from this fundamental rationale when assigning other regional classifications in the future,” the financial firm said.

A spokesperson for the Israel Securities Authority (ISA) told The Times of Israel that it had committed to change the trading days in Israel should that have been perceived as the main obstacle.

MSCI said it will continue to seek feedback from market participants and possibly revisit the issue in the future. This is the second time the firm opted to leave the Israel Index out of the MSCI Europe gauge. A previous investor poll in June 2013 revealed that a strong majority of global investors didn’t see Israel as part of their European investment opportunity set.

The ISA and the Tel Aviv Stock Exchange lobbied the MSCI again last year to try once more, in a hope that in 2022, the answer from investors would be a “yes” for a reclassification.

In late January, the Times of Israel reported that Israeli capital market players were waiting with bated breath for the MSCI decision, with one analyst saying the implications would have been “hugely significant.”

The move could have added at least $1 billion in investments into Israeli equities, according to some estimates.

Why is the MSCI important?

MSCI is a developer of indexes that are tracked by financial assets worldwide. An index is a collection of stocks that moves according to the shares held within it, and stock indexes are very popular trading vehicles as investors don’t need to investigate each and every stock, but rather just choose the index — an index with technology stocks or emerging market stocks, say — and pour their money into products that track the index. This money then gets distributed among the shares within the index according to the share-weighting on the index.

The indexes of MSCI are very popular with investors and fund managers, with some $16.3 trillion in assets under management benchmarked to MSCI indexes as of the end of June 2021 and more than 1,300 equity exchange traded funds based on MSCI indexes, as of March 31, 2020, according to the MSCI website.

MSCI clients are financial asset managers who create products that track the indices, and investors buy into these products.