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News of Israel's upgrade to "developed status" by the FTSE Group was met with mixed reactions from strategists Thursday who cautioned that the move may not necessarily translate into the big investments local market and government officials anticipate.
"Israel will be promoted to developed status from June 2008, which means potential upside of inflows of investment funds into Israel as the vast majority of funds tracking FTSE indexes is linked to developed markets," Sandra Steel, a spokesperson of the FTSE Group told The Jerusalem Post.
According to the FTSE's annual review of the classification of countries into developed and emerging market categories for 2007, Israel met all quality of markets criteria for a developed market since being included on the "Watch List" in 2006. The criteria are subdivided into four categories: market and regulatory environment, custody and settlement, dealing landscape and derivatives market.
The re-classification offers Israel the potential to attract more of the estimated $2 trillion in funds that track the FTSE's global benchmarks.
"This is an important day not just for the exchange but for the financial community in Israel as a whole,"said Ester Levanon, CEO of the Tel Aviv Stock Exchange at the FTSE ceremony in London. "The upgrade places the Israeli capital market on the same level with the leading countries in Europe."
Finance Minister Ronnie Bar-On called the move further testimony to the strength of the Israeli economy its integration into the global economy.
Although market makers and analysts viewed the upgrade as positive for Israel's market image, they were, at the same time, skeptical about the potential investment advantages of the re-classification of Israel's status.
"We view the re-classification in a decidedly mixed fashion. There do remain advantages in our view, from an investment perspective, in being considered an emerging market, even if not a pure one," said Joseph Wolf, an analyst at Lehman Brothers. "In a word, emerging markets are 'HOT' and Israel has benefited from that trend."
Wolf added that although by placing on the same developed status level with large European countries Israel was gaining exposure to a larger pool of capital, it was representing a smaller piece of a bigger pie.
"In the case of the Israeli capital market, it is better to be the king of the foxes [a big fish in a smaller pond] than the lion's tail [a small fish in a much bigger pond]," said Erez Britt, CEO of Tandem Capital. "Once the euphoria expected in the market calms down, we will see that it [re-classification] will hurt the local market and the flow of foreign investment since many investors will view Israel as a high-risk choice. If foreign funds invest in Israel classified as a developed country, they will not engage in stock picking but invest in the 5 to l0 large companies in the economy."
Britt estimated that Israel's current weighting of 1.89 percent in the emerging-market measure will shrink to 0.2% in the FTSE's developed-market index.
Meanwhile, Wolf added that, when compared with other emerging markets, the relative transparency of corporate reporting and governance compared to other countries had made Israel a distinctive low-risk investment choice for many global investors.
The sentiment was confirmed by Andrew Lynch, who helps manage $11 billion at Schroder Investment Management Ltd. in London, and said he won't be rushing to buy Israeli stocks; he waited two years before investing in Greek shares after its promotion.
"These are small markets with limited impact on the benchmark," said Lynch. "I always found it better to wait before going into a market and see what happens."
Among its other moves Thursday, the London-based FTSE Group put Greece on the Watch List for a possible downgrade from "developed" to "advanced emerging" status until June 2008.
"Some aspects of the Greek market remain restricted to international investors and, although progress has been made, the market continues to fall short of the requirements of a developed market in a number of criteria," stated the FTSE report.
At the same time, South Korea will continue to be on the Watch List for assessment of promotion from "advanced emerging" to "developed status."
Also, Pakistan will be removed from the FTSE Global Equity Index Series in June 2008 as the stock market failed to meet the minimum entry requirements for quality of markets criteria, while Hungary and Poland will be promoted to "advanced emerging" status from "secondary emerging."
Bloomberg contributed to this report.
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