Road to Israeli Reforms Paved With Gold

Several other reforms recently enacted by Sharon's government have also supported a bullish stock and bond market in Tel Aviv. These include tax cuts on capital market profits and the discontinuation of designated government bonds -- super-safe, 5.5%-yield bonds issued only for pension funds -- which will force pension funds to find other homes for their money.

"The pension funds have a new problem now -- they don't know what to do with all the money they accumulate every month, now that the designated bonds are gone," said Michael Weiss, a Tel-Aviv based investment consultant. "Some turn to invest abroad, and some increase their holdings in the securities market."

Pension funds are gradually increasing the securities portion of their portfolios from an average 20% to an average closer to 30%, boosting the daily trading volume in Tel Aviv. According to Weiss, average trading volume in Tel Aviv has increased by 25% in the last six weeks, also fueled by the trading frenzy that followed Ariel Sharon's hospitalization.

"The market in Israel, by and large, has yet to get the most out of the reforms," Ravid said. "The positive trend is likely to continue. I expect Israel's fixed-income rating to be raised from the current A-minus status in 2006."

Ravid says that the public, which has 250 billion shekels, or $55 billion, in low-interest-paying savings accounts, will start mobilizing its cash over to the securities market once the positive effects of the reforms become clear. With only 30% of the public's assets under management in Israel, there is a lot more room to grow, and opportunity for domestic and international investors alike.