Mutual funds find Israel a hard sell to investors

[Reuter / David Rosenberg]

TEL AVIV, Dec 18 (Reuter) - Israeli stocks are undervalued
and the market has great potential, but the country is a tough
sell with investors and tougher still because of growing
concerns about Middle East peace, foreign mutual fund managers
say.
``We see the current uncertainty raising the political risk
premium of the market...It will have a lower valuation than it
could,'' said one European manager of a Middle East regional fund
heavily weighted towards Israel.
As a result the fund plans to cut its Israel weighting by
nearly half over the next quarter -- a decision the manager says
is partly aimed at making the fund more attractive to investors.
``Yes, there's a marketing side. We're always keen to grow the
fund,'' he said.
The difficulty of selling an Israel country fund was
highlighted by this week's announcement the Israel Growth Fund,
an open-ended fund managed by New England Life, would wind up in
January after raising just $11.5 million over its nine-month
life.
``It's being closed simply because there wasn't demand for
the product,'' Adam Schor, portfolio co-manager and an analyst at
Chicago-based Harris Associates, told Reuters.
A London-based fund manager said -- without specifying --
that several global funds had left Israel altogether.
Israel entered the universe of emerging markets about the
time the former prime minister Yitzhak Rabin and PLO leader
Yasser Arafat shook hands on the White House lawn, kicking off
the Oslo peace process in 1993. But Israel always had trouble
attracting large amounts of emerging market money.
Speaking about the interest of foreigners in Israel,
Lysander Tennant, who manages the $132 million Israel Fund for
Barclays Global Investors, admitted: ``It's very difficult to
gauge. We have some very big shareholders who are very keen.
What's so surprising is how few players are interested in the
Tel Aviv Stock Exchange.''
Ironically, the Tel Aviv Stock Exchange went into a slump
just as the first wave of foreign interest developed. The
benchmark Mishtanim index peaked at 258 points in January 1994
and has never recovered. This year the index has fallen about
2.7 percent to approximately 203 points.
The market has been through a rough-and-tumble year marked
by a wave of bus bombings, an Israeli bombardment of Lebanon and
the surprise election victory of Prime Minister Benjamin
Netanyahu, which has raised concerns about the future of Middle
East peace.
In the meantime, Israel's gross domestic product (GDP)
growth has slowed from 7.1 percent in 1995 to an estimated 3.8
percent this year, with growth of 4.0 percent projected for
1997.
``All of this made people reluctant to invest in Israel and
to overlook a compelling investment case,'' Schor said.
Tennant said the events of the last year had not caused
investors to retreat from Israel but he said others considering
the market were taking a wait-and-see attitude.
Fund managers said they were cautiously optimistic about
next year, but their focus was more on issues such as the budget
deficit and interest rates than on Middle East peace.
``We're forecasting a reasonable dollar return for the market
in 1997, but we see it underperforming regional markets,'' said
the European manager.
Ebru Ozsezgin, who manages the $43 million Emerging Middle
East Fund for Foreign and Colonial, has about 13-14 percent of
the fund in Israeli stocks. ``We've slightly reduced it. We want
to see what will happen with the budget and interest rates,'' she
said.
As the economy slows, managers say they are moving out of
the domestic plays that were supposed to benefit from Israel's
fast-growing economy and into export-oriented and New
York-traded Israeli high-tech companies.
``We are putting more emphasis on Wall Street stocks relative
to our investment theme a year ago,'' said Ozsezgin.
But Ezer Soref, of Giza, which is a local sub-adviser for
the $70 million First Israel Fund, said the slowing economy
would not have an impact on the market. ``Prices on the Tel Aviv
Stock Exchange are so low, they have already had the slowdown
built into them,'' he said.
Fund managers do not express strong views on the impact of
peacemaking. ``I blow hot and cold from day to day,'' said one
manager, ``depending if another goofy statement comes out of the
government.''
($1 < 3.28 shekels)
--
C O P Y R I G H T * R E M I N D E R

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