Israel is saying shalom, as in good-bye, to emerging market status and is joining the ranks of the developed world according to MSCI index classifications. Israel will now be included in the MSCI EAFE index with a current weighting of 0.83% as well as the MSCI World and Kokusai Indexes, according to a recent report from Bank of America Merrill Lynch (BAS-ML).
Graduating to developed market status means more dollars from passive investment strategies (index funds) with potential net inflows of $2.8-billion, according to BAS-ML. Apparently there are $15 in developed market passive strategies for every $1 in emerging markets.
The biggest winner will be Teva Pharmaceutical (NYSE:TEVA) due to its disproportionately high 60% weighting on Israel’s stock market and the fact that 90% of shares traded are in the U.S., according to BAS-ML.
Investors might want to hold off buying Israeli equities in anticipation of the reclassification and capital inflows because the market could take a near-term hit. When Greece was reclassified to developed market status by MSCI, emerging market fund managers sold out before developed market investors started buying in, and the markets performed poorly. Investors might want to buy a few shekels worth of stocks only after the market falls.