CHAPTER XVII

THE SECURITIES MARKET

1. Main Developments

Demand for financial investments maintaining their real value grew heavierin 1972 owing to the strong expectation that the rapid inlfation would persist,and perhaps also to the appreciable nominal expansion of the household sec­tor's total asset portfolio. As regards bonds, the burgeoning demand was mainlyrelfected in the volume of new issues, and only slightly in changes in yields tomaturity in the secondary market. In shares, the principal effect was a rise inprices, although new issues were also up sharply. Demand for bonds by socialinsurance funds and insurance companies was likewise brisker in 1972, owing totheir accelerated accumulation. These two developments resulted in the mobiliza­tion of a much larger amount of capital through the securities market, theincrease amounting to 55 percent in real terms in the case of bonds alone.New issues of bonds denominated in Israeli currency (less compulsory loans)

grossed IL 2,703 million, while net proceeds came to IL 1,226 million, as againstIL 696 million in 1971. Net voluntary purchases of Israeli currency bonds by thegeneral public rose from IL 180 million in 1971 to IL475 million. Sales in theprimary share market (including convertible bonds) totalled IL 199 million, ascontrasted with only IL 53 million in 1971. Nevertheless, the index of shareprices shot up 95 percent.In spite of the much heavier bond redemption in 1972 (notably the retire­

ment of the 1967 Defense Loan), net receipts, as already mentioned, rose ap­preciably; this supports the assumption that the duration of the contractionarymonetary effect of a compulsory loan depends mainly on the date when thecertificates become tradable rather than when they mature.Trade in bonds by the general public (as distinguished from the long­term

bonds purchased by the social insurance funds and insurance companies) wasaffected by the inlfation prevailing in the economy and the belief that it wouldpersist. Private investors displayed a tendency to adjust their financial assets port­folio, with a shift toward value­linked medium­term assets (equities and especiallylinked and option­type1 bonds). Activity in the bond market was also stimulatedby the increase in real private disposable income per capita and especially in

1 Option­type loans permit the investor to choose, upon maturity, between a high rate ofinterest without linkage of the principal and interest, and a lower rate with the principaland interest linked to the consumer price index.

CHAPTER XVII, THE SECURITIES MARKET 421

private saving from total disposable income/ by the rapid monetary expansion,and the sharply larger capital import (part of which was probably channelled tofinancial assets) . The absence of expectations of a change in the external valueof the Israeli pound moderated activity in bonds linked to the foreign exchangerate and those denominated in foreign currency. These developments pushed upthe public's net voluntary purchases of Israeli currency bonds from IL 180 millionin 1971 to IL475 million.Turnover in bonds (both on the Stock Exchange and in the over­the­counter

market) shot up 129 percent in 1972 to hit IL 3,500 million; only IL 690 millionworth changed hands on the Stock Exchange, the rest being accounted for bybrokers' matching of buy and sell orders. The soaring of share prices led to aneven sharper gain in turnover in this market, so that the weight of bonds in totalsecurities turnover both on the Exchange and over the counter fell from 87 to76 percent. The expectation that rapid inlfation would continue, coupled withthe stability of the exchange rate of the Israeli pound, enhanced demand forindex­linked and option­type securities, and their yields to maturity edged downabout half a percentage point in 1972. As a result of this, as well as of the greaterdegree of perfection attained by the bond market, it was devoid of surprises inthe year reviewed, serving as an instrument for secure investments promising arelatively modest real return.The share market enjoyed a bullish trend the like of which had not been seen

in the past decade : volume (both on the Exchange and over the counter) wasup by a staggering 408 percent, the average net yield came to 110 percent, andnew lfotations totalled IL 199 million. The boom was sustained throughout theyear, apart from a slight pause in May, which was probably due to temporaryliquidity difficulties and some profit­taking. The principal factors behind the1972 boom were the much livelier demand for financial assets offering a hedgeagainst inflation; the developments in the economy as a whole, which led tothe growth of cumulative undistributed company profits (this had previously notbeen fully relfected in share pirces) ; the sizable monetary expansion, whichstimulated demand for securities bothdirectly­by increasing liquidity and theeconomy's financial assets holdings­ and indirectly by way of the expected con­tinued growth of company proifts; the real estate boom and the ensuing en­hanced interest in land and development shares; and the larger capital import,part of which apparently lfowed to the ifnancial assets market (e.g. the organi­zation of investors clubs among Jews abroad for investing on the Tel Aviv StockExchange) . In this context it should be noted that in the share market, morethan in most other spheres of economic activity, we ifnd the phenomenon of self­feeding expectations (rising share prices and investors' proifts greatly heighteningthe interest and activity of new investors, which in turn gives a further ifllip topirces and proifts).No new companies made new placements in 1972, all 12 of the ifrms raising

capital in the new issues market being familiar faces. Financial institutions and

422 BANK OF ISRAEL ANNUAL REPORT 1972

banks accounted for 82 percent of the total in 1972, land and developmentcompanies for 13 percent, and the commerce and industry group for only 5

percent. The striking features this year were the larger proportion of funds raisedthrough convertible bond issues and the fact that most of the new share flotationswere rights issues. In addition, in 1972 more Israeli firms turned to foreigncapital markets to raise equity capital.Short­Term Loan holdings of the public rose by IL 32 million in 1972, after

soaring IL 157 million in 1971. The more sluggish growth in the year reviewedwas mainly due to the shift from nonlinked to index­linked financial assets, a milddecline in the relative yield on the Short­Term Loan, and the tighter liquiditysituation which developed toward the end of the year and apparently promptedbanks to plug time deposits over the Short­Term Loan.As regards securities traded in foreign currency, the uptrend in both Stock

Exchange turnover and total holdings sagged noticeably, owing to the absenceof expectations of an imminent devaluation of the Israeli pound as well as ofextensive speculative transactions in connection with the various exchange ratechanges that took place abroad during the year. The same factors were behindthe marked decline in net receipts from new issues of Israeli securities traded inforeign currency, which totalled IL 19 million compared with IL 87 million in1971. Another possible reason was the swelling of Pazak and Tamam deposits,due partly to the fact that not all the personal restitution receipts were con­verted and, primarily, to the revaluation of several European currencies and thedevaluation of the U.S. dollar and the Israeli pound, which appreciated the ILvalue of the deposits denominated in revalued currencies.The lack of devaluation expectations depressed the agio on the Natad2 and

free market dollars to an extremely low level in 1972. Since the 1971 devaluationthe agio 0/2 the free market dollar has exceeded that of the Natad dollar, incontrast to the situation between the 1967 and 1971 devaluations.

2. The Bond Market

The year under review saw a growing demand for bonds, especially thoselinked to the cost­of­living index. This relfected the expectations engendered bythe ongoing inlfation and apparently also the big increase in the households'asset portfolio, which stimulated demand for ifnancial investments, includingbonds. Because of the structure of the bond market, and especially the highlyelastic supply in the primary market, the livelier demand found expressionprimarily in the volume of new issues and only slightly in a rise in secondarymarket pirces over and above that attirbutable to the increase in the cost­of­livingindex and the accumulation of interest.

2 The Natad dollar is explained in section 6.

CHAPTER XVII, THE SECURITIES MARKET 423

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to

­TableXVII1

DOMESTIC SECURITY ISSUES, 1971­72*

)IL million)

19721971

IncreaseRedemp­Redemp­or de­

crease(­)Totaltion ofinterestNet

Redemp­tion ofGrossTotal

tion ofinterestNet

Redemp­tion ofGross'

in netproceeds

proceedsagediffer­

issueprin­cipal

issueproceedsagediffer­

issueprin­cipal

issue

entialsentials

Regular bonds

Long­term"

Government loans

Nongovernmental loans"

Long­term issues to insurancecompanies*

Government loans

Nongovernmental loans*Option­type*

Government loans

Nongovernmental loans

Linked 6.5 percent loansGovernment

315.8831.5337.61,169.1112.31,281.4515.7264.9780.6118.0­898.6

­19.4­29.922.0­7.911.43.5­10.528.117.613.130.7

335.2861.4315.61,177.0100.91,277.9526.2236.8763.0104.9867.9

13.466.732.899.59.8109.353.311.765.06.171.1

7.635.913.349.24.954.128.30.228.50.729.2

5.830.819.550.34.955.225.011.536.55.441.9

293.6525.1137.7662.8206.2869.0231.563.0294.5102.4396.9

134.0294.780.6375.3120.6495.9160.721.4182.141.0223.1B

159.6230.457.1287.585.6373.170.841.6112.461.4173.8

438.0438.05.6443.60.0443.60.00.00.00.00.0

238.1238.13.5241.60.0241.60.00.00.00.00.0

Nongovernmental 0.0 0.0 0.0 0.0 0.0 202.0 0.0 202.0 2.1 199.9 199.9

Total regular bonds traded

inIsraeli currency 1,366.6 226.5 1,140.1 339.6 800.5 2,730.3 328.3 2,375.0 513.7 1,861.3 1,060.8

­67.818.889.9108.748.2156.986.671.5158.138.9197.0Bonds traded in foreign currency11

Compulsory loans'

­390.9545.9260.6806.5374.41,180.9936.840.8977.663.81,041.4From the public

­31.3­128.658.0­70.670.60.0­97.340.8­56.563.87.3Absorption Loan

­366.382.0202.6284.6303.8588.4448.30.0448.30.0448.3Defense Loan

6.7592.50.0592.50.0592.5585.80.0585.80.0585.8Compulsory Savings Loan

27.7129.00.0129.00.0129.0101.30.0101.30.0101.3Bank Defense Loan

199.20.0199.20.0199.252.80.052.80.052.8Shares and convertible bonds

117.4143.20.0143.20.0143.225.80.025.80.025.8Shares1

29.056.00.056.00.056.027.00.027.00.027.0Convertible bonds

oM

w93

Itijw " Excluding sales of foreign securities in Israel. The data in this table relate only to issues with a prospectus and securities of the Government,h Jewish Agency and its subsidiary, which are issued without a prospectus.2 " Issued mainly to the social insurance funds.(3 c Consists mainly of ifnancial institution issues.H d The reference is to the deposits made by the insurance companies with the Bank of Israel and not to the value of Insurance Companies LoanH certiifcates into which the deposits are converted at fixed dates during the year. These estimates assume that none of the bonds issued by thew Electric Corporation and registered on the Exchange were held by insurance companies.S e By the Israel Electric Corporation.!£ ' Includes early redemptions (actual ifgures for Government loans and estimates for nongovernmental loans).7\ s Includes the Development Loan issue sold to the banks, in the amount of IL 400,000 in 1971.3 i The data were calculated in Israeli pounds, according to the oiffcial rate of exchange: until August 1971 at IL 3.5 to the dollar, and from

August 1971 atIL 4.2 to the dollar.' The amount collected from the public and not the value of the certiifcates distributed.

^A ' Share issues of companies listed on the Stock Exchange which were offered to shareholders of record or to the general public./f Source: State Loans Administration, Bank of Israel.

)a) New issues

Sales of long­term bonds to social insurance funds and insurance companiesgrossed IL 1,391 million in 1972, as against IL 970 million the year before,while sales of option­type and index­linked bonds (which are mostly purchasedby the general public) shot up from IL 397 million in 1971 to IL 1,313 million.Net long­term loan receipts (i.e. after deducting the value of bonds redeemed andreinvested) rose from IL 569 million in 1971 to IL 898 million, while net pro­ceeds from option­type and index­linked loans (less IL 506 million in compulsoryloan redemptions) came to IL 328 million in 1972,3 compared with IL 127million the year before. Foreign currency bonds issued by Israeli companiesand institutions totalled IL 157 million, as against IL 197 million in 1971, butnet receipts from this source amounted to only IL 19 million (these data will bedetailed below).The growth of net bond receipts far outpaced the rise in the general price level

or national income; they increased the total amount of capital mobilized in 1972by 55 percent4 and brought up the weight of bond proceeds (less compulsoryloans) in national income from 3.65 percent in 1971 to 5.16 percent.It is notewotrhy that in spite of the heavier redemption, particularly of the

various compulsory loans, net proceeds from sales to the general public (i.e.option­type and index­linked bonds) rose appreciably. This lends support to theassumption that the redemption of bonds does not, as a rule, affect the size andcomposiiton of the investor's potrfolio, for as the security approaches maturity,the owner holds it voluntarily and not under compulsion, and it is thereforeplausible to assume that he will reinvest the proceeds in similar paper. Con­sequently, the compulsory loans begin to exert their expansionary monetary in­lfuence when they become tradable, either on the Exchange or in the over­the­counter market, and not when they are actually redeemed (those who haveno desire to hold on to this sort of ifnancial asset sell their certificates in themarket, thereby dampening new issues) . The duration of the contractionaryeffect of a compulsory loan thus depends mainly on the date when the paperbecomes tradable, and not when it matures (see Table XVII­1 ).The public's voluntary purchases,5 both direct and through mutual funds or

3 The total of items 3 and 4 in Table XVII­1, less redemption of principal, interest, andlinkage differentials on the compulsory loans. ,

4 Delfated by the annual average rise in the implicit GNP price index. The use of theconsumer price index gives an increase of approximately 56 percent.

5 Voluntary purchases of bonds denominated in Israeli currency were calculated in thefollowing manner: to total net receipts from option­type and the new seven­year index­linked bonds we added that portion of the compulsory loans which had been held by thesocial insurance funds and insurance companies and whose redemption thus increased grosspurchases of long­term securities rather than securities of the type purchased by individualinvestors (this is estimated at IL 5 million in 1971 and IL 25 million in 1972), and thatportion of the compulsory loan 1certificates which had become tradable, resulting in their

426 BANK OF ISRAEL ANNUAL REPORT 1972

Table XVII­2

MEDIUM­ AND LONG­TERM BOND ISSUES, 1972­

)IL million(

Long­term bondsthe publicMedium­term bonds sold to

BondsCon­denomi­XotalSold to insurance

Sharesvertiblebonds

natedindenomi­Bank

Defensecompanies £ socialinsurance funds

S.5% index­linkedOption­typeEnd of period

foreignnatedLoa.n1 otaL

OtherGovt.bOthercur­inILOtherGovt."

rencycoX

25.827.0197.01,071.0101.3909.895.9396.9­­173.8223.11971V143.256.0156.91,519.7129.01,333.157.61,312.6202.0241.6373.1495.91972w

­­13.876.012.158.35.654.4­­21.433.0January53

­­4.874.310.660.23.557.6­­13.444.2February\ ­6.4­10.581.411.267.23.057.7­­14.743.0March­­­115.90.7111.43.8126.335.662.511.017.2AprilH

M

1.36.021.7110.215.488.66.2100.94.624.834.836.7MaytMw

66.4­13.7114.67.899.77.1122.320.821.028.651.9Junev<

8.94.038.9104.27.892.93.5101.48.615.433.244.2Julyo

­6.024.0111.021.885.24.0111.419.217.233.241.8August12.07.06.5132.110.4117.74.0120.331.915.629.643.2September

­­1.6211.110.4195.45.3120.921.123.336.739.8Octoberwen

39.933.00.1160.310.4144.45.5166.539.520.160.746.2November8.3­3.3228.610.4212.16.1172.920.741.755.854.7December<

3

fif.

" See note " to Table XVII­1. The data here refer to actual sales and not the volume of authorized issues. However, not all the issueswere listed on the Stock Exchange, especially in the case of long­term bonds.

* Excluding Compulsory Loans.c Including Hollis.Source: State Loans Administration.

approved bank savings plans, increased by IL 475 million in 1972, compared withIL 180 million the year before.6The greatest spur to security purchases, as already noted, was 'the spiralling

of prices in the economy and the expectation that this trend would continue,which enhanced investors' preferences for financial assets linked to the cost­of­living index over short­term nonlinked assets and even over those linked to theforeign exchange rate (mainly Pazak and Tamam accounts and bonds linkedto or denominated in foreign currency). The result was not only a reshuflfing ofthe economy's total portfolio of financial assets, but also a rise in the weightof index­linked bonds in incremental holdings. This was relfected by someslackening in the growth of unlinked ifnancial assets (such as time depositsand the Short­Term Loan) and a big increase in linked assets. This processof portfolio adjustment found expression in both the primary and secondarymarkets, and it was facilitated by the existence of a stock of linked bonds withdiffering peirods to maturity, including bonds falling due within a few months, sothat it was possible to make linked investments even for very short periods.7Several other factors stimulated the sale of securities : the rise in real private

spendable income per capita; the increase in private saving, some of which un­doubtedly lfowed to the securities market ; the rapid monetary expansion, whichwas mainly fueled by the large­scale capital import, part of which was apparentlychannelled to ifnancial assets, including bonds ; and the appearance of a new typeof bond on the market in April.8 (It is not clear exactly how much the diversiif­cation of the types of bond issues boosted net sales. But in general it seems to havehad a stimulative effect, at least marginally, for the new bond, which paysinterest every six months, is a suitable instrument for those desiring a current in­come from their investment.)An examination of the trends in the primary bond market in the course of the

year shows an uninterrupted rise in both gross and net issues and in total pro­

sale by some of the recipients. (In 1972 about IL 160 million worth of compulsory loancertiifcates were distributed, as against IL 64 million in 1971; assuming that half thissum was sold at an average price of 150, this source added IL 120 million to voluntarysecurities holdings, compared with IL 48 million in 1971; from this we deducted thevalue of compulsory loans redeemed.)

c This figure is still downward­biased, as we have assumed that all the interest receivedwas reinvested. Actually, part of it was spent on current consumption, so that the demandfor these bonds was greater than indicated here.

7 While linked bonds with long maturities may also be purchased and resold after severalmonths, there is the risk of a capital loss due to changes in secondary market yields.

8 This is a seven­year linked bond bearing 6.5 percent interest payable every six months; oneseries features the redemption of principal in installments. Since the interest is paid currently,there is not much chance of bond washing (the sale of bonds close to maturity, mostlyto investors exempt from the payment of income tax thereon). The net yield will thereforebe 4.9 percent, the same as on option­type linked bonds; however, this is more certain inthe case of the seven­year bond, since there is no danger of the future abolition of bondwashing, which would affect the yields on option­type paper.

428 BANK OF ISRAEL ANNUAL REPORT 1972

ceeds. In the last quarter gross issues of Israeli currency bonds reached IL 1,029million, in contrast to IL 368 million in the ifrst, while net issues and total pro­ceeds reached IL 884 million and IL 710 million respectively in the last quarter,as against IL 311 million and IL 206 million respectively in the ifrst. This de­velopment was due to a number of factors, the most important of which were asfollows : redemption of the 1967 Defense Loan in June, seasonality in the accu­mulation of the severance pay and provident funds for self­employed, the strongrise of the general price level and expectations that this trend would per­sist, and the long­run advancing trend in the mobilization of capital throughIsraeli currency secuirties, relfected in 1972 not only in the annual averagelevel but also by the change in the course of the year (see Table XVII­2).The weight of direct Government issues tapered off in 1972, after a notable

increase in the preceding year ;9 this relfected the Government's policy of shiftingfrom the lfotation of bond issues through the ifnancial institutions in favor ofdirect sales by the Treasury. The identity of the issuer has almost no signiifcanceto the investor, so that this policy was not due to any change in investors'preferences. The advertising campaign mounted in connection with Governmentloans apparently has had some inlfuence on sales, especially as the other bondissues have not beneifted from similar publicity. However, this has been partiallycounterbalanced by the fact that the certiifcates are acquired through com­mercial banks, which encourage the sale of bonds issued by their afifliated if­nancial institutions. Nevertheless, Government paper is more heavily traded thanthe other bonds, giving it an edge over the latter.In contrast to previous years, there was hardly any increase in 1972 in the

amount of compulsory linked loans listed for trade on the Exchange. The netresult of the continued redemption of early Absorption Loan seires on the onehand and the listing of the 1966 series on the other was a IL 35 million increasein tradable Absorption Loan capital (excluding the distirbution of certiifcates ofthe 1967 Absorption Loan, which was not yet listed for trade on the Exchange) .

As regards the option­type bonds, redemption of the 1967 Defense Loanamounted to IL 506 million. The 1970 Defense Loan and the 1970 Savings Loan(whose certiifcates were distirbuted in 1972) are not listed on the Exchange,nor can they be traded outside the Exchange, so that the distirbution of thesecertiifcates had almost no effect on bond sales in the pirmary market.10

9 See Bank of Israel, Annual Report 1971, p. 403 for a discussion of the extent of Governmentsupervision and 1control over the primary market­ both the raising of funds and their allocation.

10 Assuming that those who regard these bonds as part of their ifnancial assets portfolio are nota victim of the "distribution date illusion" and date their ownership to the time the loanwas collected and not when the certificates were distributed, and who therefore adjustedtheir voluntary securities purchases in the year in which the loan was collected. This appliesespecially to the Savings Loan, which will mature in the near future.

CHAPTER XVII, THE SECURITIES MARKET 429

0

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2

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W

33

JO

­TableXVII3

GENERAL TRENDS IN STOCK EXCHANGE TRADING, 1970­72

)IL million)

Bonds

LinkedLinkedOption­to theto thetype­c­o1exchange

indexrate

T j Non­lrj^ea Convertible linkedforeign int0 a.nd,C™V Shar6S ,Xte

TotalShort­TermLoan

Shares" Totalsecurities

1970

1971

1972

January

February

March

April

May

June

389.752.3115.7221.71.1­48.9102.349.819.6

623.9105.7150.1368.10.92.482.2210.456.815.4

1,666.4762.9212.5691.00.612.8107.8441.9112.415.5

98.734.418.346.00.10.29.829.45.41.1

. 119.656.411.651.60.10.610.234.64.91.2

119.750.717.251.80.00.39.536.05.01.0

155.385.417.252.70.10.37.832.211.11.2

120.349.117.453.80.00.47.826.38.11.2

131.145.516.369.30.00.39.349.98.01.8

0

לוי

ןנ?1/1W

G50

in

>

M>­3

July

August

September

October

November

December

1970

1971

1972

1970

1971

1972

66.90.10.67.246.111.61.3

61.30.01.58.740.19.51.5

49.80.11.18.131.97.90.7

59.90.12.18.735.311.52.2

57.40.01.012.232.99.91.4

70.50.04.48.537.219.50.9

decrease (­)increase orannualPercent

4.5bb24.7­0.70.6

66.0bb68.1105.614.1­21.4

87.7bb31.1110.097.90.7

12.85.0

9.12.5

6.70.9

Percentage distribution

26.3 12.5 ­ 0.3 56.9

33.7 13.2 0.4 0.1 59.0

26.5 6.5 0.8 0.0 41.4

131.751.813.0

142.664.816.5

125.864.211.8

178.2100.817.5

143.956.729.8

199.5103.125.9

­15.7

29.7

41.6

29.7

24.1

12.8

­51.2

102.1

621.8

­14.6

60.1

167.1

100.013.4

100.016.9

100.045.8

" Listed ordinary and preferred shares, unlisted shares traded off the lfoor, and shares traded in foreign currency.* Because of the small sums involved the percentage change lacks signiifcance.Source: Tel Aviv Stock Exchange.

)b) The secondary market

Turnover in listed bonds was, at IL 3,500 million,11 up 129 percent in 1972;of this sum, only IL 690 million (20 percent) was traded on the Exchange,while the rest was mainly accounted for by brokers' matching of buy and sellorders.12 Nevertheless, the boom in equities depressed the weight of bonds intotal listed securities traded both on the Exchange and in the over­the­countermarket from 87 percent in 1971 to 76 percent (see Table XVII­6).Yields, especially of index­linked and option­type bonds, edged down a bit be­

cause of the brisker demand for bonds and the inability of the primary marketto completely meet it due to the insuiffcient diversificaiton (from the aspect ofperiod to maturity) of the bond issues. It should be noted here that the heavierturnover implied an increase in the liquidity of bond investment, and this is itsprincipal signiifcance.13Option­type paper accounted for 64 percent of total bond transactions on the

Exchange14 in 1972, compared with 57 percent the year before. The weight of theDefense Loan in total opiton­type bond turnover fell from 73 percent in 1971 to57 percent, owing to the redemption of the 1967 issue. The upswing in option­type bond turnover from IL 210 million in 1971 to IL 441 million and in theirweight in total Stock Exchange trade reflects the dominant position of this in­strument in the secondary bond market, which is not connected solely with theavailability of tradable compulsory loans.

As regards the investor, the distinction between option­type and index­linkedbonds was narrowed this year, because the accelerated rise of the consumer priceindex over the past several years and the expectaiton that this trend would con­tinue made it virtually certain that the option­type bonds would be redeemedaccording to the linkage alternative (see note 1 on p. 421). Demand shifted toifnancial assets pegged to the index, with the result that issues of both types ofpaper were stepped up, the yield to maturity declined, and trade therein roseto IL 554 million, or 80 percent of total bond turnover on the Exchange (seeTable XVII­3).

Since the inlfation made the linkage alternative on option­type bonds virtually

1­*­ The signiifcance of the volume of such trade and changes therein lies in the fact that theynot only indicate the changes in investors' expectations but also in the liquidity of this typeof investment.

12 It makes no difference to either the purchaser or the seller whether the order was transactedon the Exchange lfoor or through internal offsetting; therefore, in analyzing the supply anddemand factors it is total turnover that counts.

13 If the expectations of all the individual investors in the economy concerning the determinantsof the demand for bonds were to change in the same direction and at the same rate, therewould be no great expansion of turnover in periods of changing demand. But as this is notthe case, even when expectations change in the same general direction, turnover generallyexpands.

14 The discussion of turnover in the various share groups will be conifned to trade on the StockExchange owing to the lack of a reliable group breakdown of overall trading volume.

432 BANK OF ISRAEL ANNUAL REPORT 1972

<

w

03

­TableXVII4

AVERAGE NET YIELDS TO MATURITY' OF BONDS TRADED ON THE EXCHANGE," 1972

)percentages)

Option­typeIndex­linked"Dollar­linked\'fnnt­hc

On anonlinked

On alinkedTotal5 +2­5Upto 2Total5 +2­5Upto 2

J.Y.LU11 LiX

Years to matuirtybasisbasis

8.18.05.04.95.26.96.47.79.61971 December6.06.45.45.45.16.76.96.67.68.41972 January5.06.55.15.34.66.77.16.88.08.7February5.75.44.64.84.44.37.57.18.29.4March6.76.95.55.25.67.68.17.68.610.7Aprilo

K4.95.95.45.35.46.38.07.59.010.9May/

w 5.05.85.75.55.66.97.36.99.09.2June4.44.34.95.24.64.06.06.1e5.4July58

8.45.65.15.25.04.55.75.75.4August7.95.24.94.94.85.05.85.85.7September7.85.05.15.35.05.65.25.45.9October7.15.15.95.35.86.65.85.86.1November6.44.95.95.46.8.5.95.96.0DecemberW

Yields on newlyWO

10.84.84.8No saleissued bondsGלק

Less25 percent income tax in the case of dollar­ and index­linked bonds. For option­type bonds the gross yield to maturity is given here,as this is what the investor will actually receive net because of the practice of bond washing. However, for comparison with the yield onother bonds purchased in the secondary market, several tenths of a percentage point have to be deducted, because the investor who sells hisbond close to maturity will not receive the full redemption value but a slightly lower sum.

" The principal type of bond excluded here (as only a small fraction is listed on the Exchange) is the long­term paper sold to social insurancefunds and insurance companies. The Absorption Loan and the 10­year Defense Loan are also excluded from the data, even though they aertraded on the Exchange and account for the /ion's share of the volume. This diminishes the signiifcance to be attached to the rates ofreturn listed here.

c According to the quotations on the 18th of each month.d The yields on newly issued index­linked bonds relate to the new seven­year seires." No data published.Source: Central Bureau of Statistics.

certain, the yields on a nonlinked basis fell far below their level upon issue andthus lost their relevance to the investor (see Table XVII­4) . For this reason,the analysis here will be conifned to yields calculated on a linked basis. In 1972the average net yield to maturity so computed was 5.6 percent, compared with5.9 percent in 1971. It held steady throughout the year, except for a sharpspurt in April, apparently because of the tight liquidity situation that month,which also affected the bond market.Trading in index­linked bonds soared 98 percent this year to reachIL 112

million, 'though their weight in total bond turnover only inched up from 15 per­cent in 1971to 16 percent. The brisker trade relfected the operation of a numberof supply and demand factors : The year reviewed saw the start of Stock Ex­change trade in the 1966 Absorption Loan, while the partial redemption of earlierAbsorption Loan series continued, the net result being a IL 35 million increase intotal listed capital in this loan. In addition, trade began this year in the newlinked bonds issued for seven years at 6.5 percent (gross) interest (see section 2a) ,and this too augmented the stock of linked bonds. But at the same time themuch larger supply of index­linked paper, the mounting inlfation, and the ab­sence of devaluation expectations led to a heavier demand for linked assets (seethe discussion above) .

Examination of the development of Stock Exchange transactions in linkedbonds in the course of 1972 shows a steep rise from April onward : whereasduring the ifrst three months turnover averaged IL 5 million a month, duringthe last nine months the level jumped to IL 1 1 million. This was mainly due tothe listing of the 1966 Absorption Loan and the start of sales of the new seven­year linked loan­ both of which occurred in April and greatly enlarged thestock of securities.Table XVII­4 shows that yields to maturity on index­linked bonds declined

from an annual average of 5.9 percent in 1971 to 5.3 percent during the yearunder review. The yields on option­type bonds calculated on a linked basis alsoslipped somewhat, but remained a bit higher than those on the former typeof paper. However, since the data on the linked bonds are based on only asmall fraction of the total stock of tradable paper, little signiifcance should beattached to this development, especially in view of the difference in the peirods tomatuirty of these two types of bonds.Turnover in bonds traded in foreign currency rose relatively little in 1972­

from IL 82 million in 1971 to IL 108 million (the reasons for this are presentedin section 6).A new feature of the Israeli bond market is the appearance, since last year,

of capital notes issued by vairous banks and of bonds convertible into shares.Since changes in the pirce and turnover of this kind of paper are largely con­nected with the pirce which will be set for the share into which the bond maybe converted, it is impossible to analyze this segment of the bond market,especially in view of its newness and the differential terms of the various bonds.

434 BANK OF ISRAEL ANNUAL REPORT 1972

Table XVII­6 shows that in 1972 bond transactions in the over­the­countermarket expanded while equity trade on .the Exchange shrank. The difference intrend is mainly attributable to the lack of a developed market for trading inbonds at variable prices, an arrangement permitting the offsetting of buy andsell orders received during the day. The possibilities of offsetting increase with airse in turnover, so that the growth of turnover in 1972 resulted in a larger volumeof such transactions.The concentration of bond trading is presented in Table XVII­8. It reveals

three distinct groupings : a small group of heavily traded bonds, a not verylarge intermediate group of bonds with a limited but nevertheless active trade,and a large group of bonds which are in fact inactive (and whose pirces and yieldsto maturity are therefore of little signiifcance).The Absorption Loan series are the most heavily traded of the linked bonds

(they accounted for 68 percent of total turnover in such paper in the yearreviewed). They were followed in 1972 by the new seven­year loan, which in thefew months since its appearance succeeded in contributing 16 percent to theyear's turnover. There is hardly any trade in the other listed linked bonds, asthey are mostly held by institutional investors who either do not trade in themat all or do so in the over­the­counter market. Fluctuations in the prices ofthese bonds mainly represent "pirce adjustments" which are made from timeto time because of a irse in the cost­of­living index and the accumulation ofinterest ; there is no connection between these changes and turnover, and theystem to only a minor extent from lfuctuations in the supply and demand forsuch paper.The stock of listed bonds in 1971­72 is presented in Table XVII­9, which

shows the changes that took place duirng the year reviewed in both the com­position and size of the economy's bond portfolio due to the operation of themarket forces descirbed above.Finally, it should be noted that since equities proved more glamorous

in the year reviewed, they tended to moderate the expansion of activity inthe bond market, as part of the funds which in previous years had lfowed to thebond market nowwent to shares. Other contributory causes were the lack of "bar­gains" in the bond market, which had attained a high degree of perfection,the fact that no trade was allowed in the Defense and Savings Loan certiifcatesdistirbuted in 1972; and the rather unattractive yield offered by the 1966 Ab­sorption Loan (listed for trade on the Exchange in 1972) compared withearlier seires of this loan.If to these factors is added the absence of devaluation expectations, it can

be said that the bond market was devoid of surprises in 1972, serving asan instrument for conservative investments, although in common with manyother stock exchanges, it occupies a dominant position from the aspect of thevolume of trade and issues.

CHAPTER XVII, THE SECURITIES MARKET 435

Table XVII­5MONTHLY SHARE TURNOVER ON TEL AVIV STOCK EXCHANGEAND OVER­THE­COUNTER MARKET, BY SHARE GROUP, 1972­

)IL thousand(

Listed

Total"

pre­ferred

shares &L

unlistedshares

Invest­mentcom­panies

Fuelandoil

Industryandcom­mercec

Landand

develop­ment

Financeand

insurance11Month

sold offthe lfoor

34,3552,2664,6177319,9055,99010,846January17,7665952,2283194,2191,8198,58656,4361,7968,0201,70615,98210,47818,454February26,3484994,0971,4556,4914,9938,81350,6971,4696,6241,73413,06412,10815,698March20,7213353,0568463,9374,5098,30885,3912,37211,5612,57814,76917,24036,871April32,6346344,9579994,6658,69412,68549,1311,4967,1461,81910,87711,51216,281May16,5193071,9176532,7603,0787,80445,4713,1054,37760414,2838,63314,469June36,7736921,66118113,6671,71718,85551,8473,5859,17076312,09712,62913,603July40,6092,0953,7242403,86911,81218,86964,7712,77912,4221,32214,08713,78820,373August26,5211,8953,8214243,5053,97412,90264,2302,95614,6102,10614,57610,01019,972September30,5284,5346,0414475,2903,05411,162100,8136,04022,2101,67315,6269,69945,565October36,7574,4056,9825713,6852,84918,26556,7433,37612,39978410,1016,32823,755November23,3049715,4822982,7492,04511,759103,0825,23421,1002,04413,63712,55248,515December41,4226,0768,2337503,8973,74518,721

1,112,87159,512186,45725,047217,738183,256440,861Total, 1972762,96736,474134,25817,864159,004130,967284,402On the Exchange349,90223,03852,1997,18358,73452,289156,459Over the counter

219,1889,89329,3364,46831,51022,396121,585Total, 1971105,6917,25011,3453,04622,56315,16646,021On the Exchange113,4972,64317,9911,4228,9476,93075,564Over the counter

408502536461591718263Percent change6224031,083486605747518On the Exchange208772190405566655107Over the counter

" Upper and lower ifgures indicate the volume of trade on and outside the Stock Exchange(the over­the­counter market) respectively.

" Shares traded in both Israeli and foreign currency." Includes public utilities.a Discrepancies in total are due to the rounding of individual ifgures.Source: Tel Aviv Stock Exchange.

436 BANK OF ISRAEL ANNUAL REPORT 1972

3. The Share Market

Demand for ifnancial assets maintaining their real value grew sharper in1972. This was especially true of shares, but unlike the situation in the bondmarket, the supply of new share issues is relatively inelastic in the short run,so that the stronger demand was relfected primairly in a steep price rise, and toa relatively small extent in an increase in new issues. However, the latter wassubstantial in comparison with the past few years. In addition, several otherdevelopments in the demand for equities and the business outlook of the com­panies with listed shares contirbuted to the upsurge of turnover, pirces, and evennew issues.

(a) The secondary market

The secondary market for listed shares expeirenced a boom recalling thatof the early 1960s: the daily index of share prices jumped 95.3 percent in thecourse of the year, trading volume soared 408 percent, and the net average yieldon shares held for the entire year reached 110 percent. While this trend hadbegun at the end of 1970 and grew more pronounced duirng 1971, it picked upconsiderable momentum in the year under review.An examination of developments in the course of 1972 ( FiguresXVII­1 and

XVII­3 and Table XVII­7 ) reveals two interesting features : ifrst, the boomwas sustained throughout the year, with the exception of a slight retreat in May;and second (and even more important), the sharp uptrend in share pirces

Table XVII­6

QUARTERLY TURNOVER ON TEL AVIV STOCK EXCHANGEAND OVER­THE­COUNTER MARKET, 1971­72

(IL million(

Shares Bonds"

Over­the­

countermarket

Onthe

ExchangeTotal

Over­Ratio the­

(l)­=­(2) countermarket

Onthe

ExchangeTotal Ratio

(5)^(6(

)1( )2( )3( )4( )5( )6( )7( )8(

3.141,523.2368.11,155.11.07219.2105.7113.519714.043,484.1691.02,793.10.461,112.8762.9349.919722.25484.4149.4335.50.46206.3141.564.8I19723.80843.0175.8667.20.48265.9180.085.9II3.96882.0178.0704.00.54278.5180.897.7III5.781,274.2187.81,086.40.39362.1260.6101.5IV

* Excluding the Short­Term Loan.Source: Tel Aviv Stock Exchange.

CHAPTER XVII, THE SECURITIES MARKET 437

Figure XVII­1DAILY INDEX OF SHARE PRICES,

1971­72

(December 1970=100(

­­260

/­.240 /220200

1180

I160

140

120'.­­rn 1 1 ^1­ 1 1 1 1 1 1100

1971 1972

Source: Central Bureau of Statistics.

was accompanied by an even faster increase in turnover, testifying to a relativelybroad and ifrm capital base rather than relfecting a technical rise in prices in a

tiny market.The equity market boom permeated

all groups in almost equal measure, theoverall arithmetic average net yield rang­ing from 101 percent (for ifnance andinsurance stocks) to 113 percent for in­dustrials. In turnover, however, the dif­ferences were wider, the rise rangingfrom 263 percent (in ifnance and in­surance) to 718 percent (in the land anddevelopment group) . Such an even groupdistirbution of yields was a rarity in pre­vious years; it is explained by the factthat the forces producing the 1972 boomoperated in all sectors of the economy,and also because a boom of this year'sdimensions tends to pull up pirces across

the board, without investors displaying any discirminative judgment or attempt­ing to study the performance of the various groups.This unprecedented boom in the secondary share market was sparked off and

fueled by a relatively large number of factors, of which only the most importantwill be described here. First was the buoyant level of activity in the economy as awhole in the last several years, which led to a marked improvement in companyprofits and prospects for the future, which in the past had not been fully re­lfeeted in the movement of share prices. True, the adjustment process had begunin 1971, but it reached full swing only in 1972. Company policy contirbutedto this : the number of stocks on which cash dividends were paid rose from 78 in1970 to 85 in 1972, dividend rates went up this year, and the number of stockdividends rose from 9 in 1970 to 35. The second factor was the appreciablecapital import, whose impact on the share market was felt both directly (partof the capital was invested in financial assets) and indirectly (by way of theaccelerated monetary expansion and the resulting high level of liquidity whichmarked most of 1972). These developments contributed to the share marketboom through the adjustment of the public's securities portfolio, the expansionof the banks' potential for ifnancing investors' securities transactions, and byinlfuencing company proifts and future business prospects. In this context itshould be stressed that, while the sizable capital inlfow was a major cause of therapid monetary expansion in 1971, an above­average portion was intended fromthe outset for investment in ifnancial assets rather than for consumption, andthis gave added impetus to the share market boom. Thirdly, an increasing num­ber of investors clubs were established in Jewish communities abroad for invest­

438 BANK OF ISRAEL ANNUAL REPORT 1972

ing in Israeli securities, mainly shares. The year reviewed was especially favorablefor this sort of activity, given the absence of devaluation expectations and thevigorous bullish trend in the Israeli share market.15 Fourthly, in 1972 the boomin the real estate market gathered momentum, and since the purchase of landand development shares is about the only way the small investor could participatein this boom (the smallest investment unit is relatively large and thus beyondthe reach of the small investor), turnover in such shares rose by a staggering720 percent, compared with the 408 percent gain in overall share trading on theExchange.Finally, the share market, more than any other economic sphere, exhibits

what is known as self­feeding expectations; that is, the rallying of the marketand share prices attracts the interest of the general public, institutional investors,and speculators in both short­ and long­term investments through the Exchange,and funds start to lfow to this market, thereby accentuating the upswing. Thereare no reliable figures on the number of persons investing in the stock market, butinformation from various sources points to a big spurt in 1972; thus this marketjoined the real estate market in attracting speculative capital in 1972. Mostlikely not all the newcomers will pull out of the market as soon as the speculativeboom peters out, but some will continue to invest on the Exchange, therebyaugmenting the fairly small nucleus of long­term equity investors. Institutionalinvestors­ social insurance funds, commercial banks, financial institutions, etc.­have also manifested a growing interest in the Stock Exchange, as relfected bytheir larger volume of transactions thereon and the expansion of their shareportfolio.

A glance at TableXVI1­5 shows that the growth of turnover on theExchange far eclipsed that in over­the­counter transactions­ 620 as against 210percent ; this depressed the weight of the latter from 52 percent of total tradein listed shares in 1971 to 31 percent.Two types of transactions are conducted outside the Exchange. The first

is the matching by brokers of buy and sell orders of the general investing public,with only the balance being brought to the Exchange at the opening of theday's trading. The second type consists of transactions of institutional investors(investment companies, mutual funds, etc.) and other large investors who forvarious reasons (including anxiety about the effect that large demand or offersmay have on prices) prefer to execute part of their transactions in the over­the­counter market. In contrast, the bulk of the trade on the Exchange representsorders of the general public which were not matched by brokers, as well asorders received in the variables session, which ipso facto hardly lends itself tothe offsetting of buy and sell orders.The downtrend in the weight of over­the­counter trading embraced all share

15 Formal foreign currency transfers for securities investment totalled about $ 35 million, asagainst some $ 20 million in 1971.

CHAPTER XVII, THE SECURITIES MARKET 439

0

a>z

o

wr>zz

Igvo3CD

­TableXVII7

NET OVERALL RATES OF RETURN ON AN INVESTMENT IN LISTED ORDINARY STOCKS, SELECTED PERIODS, 1970­72

)percentages)

PeriodLowestoverallrate ofreturn

Overall rates of return by deciles

10 25 50 75 90

Average Averageoverall overall

Highest Arithmetic rate of rate ofoverall average return returnrate of rate of (weighted weightedreturn return by total by annual

listed volumecapital") of trade"

Numberof

stocks

Numberof

com­panies

31.12.71­30.6.72 ­5.2 4.8 24.8

30.6.72­31.12.72 ­2.0 4.4 26.7

31.12.71­31.12.72 5.8 41.7 67.5

1. Banking, ifnancing, insurance

35.1 47.8 79.8 102.0

44.4 53.4 69.8 109.7

100.7 132.4 166.1 195.3

264147.735.336.8

243839.148.742.2

2438103.8100.8100.8

31.12.71­30.6.72 16.8

30.6.72­31.12.72 ­4.4

31.12.71­31.12.72 28.8

56.727.0

12.46.2

77.244.5

2. Land and development

75.4 97.7 99.6 123.4

16.4 19.6 39.0 79.4

103.9 125.7 170.3 205.8

121588.166.171.4

121518.227.920.6

1215122.0112.8106.8

40.026.114.2.71­30.6.7212,31.

9.5­1.8­35.16.72­31.12.7230.

69.028.7­10.5.71­31.12.7212.31.

223491.973.170.3

223418.817.523.9

2234123.798.7112.7

151943.331.740.0

141749.289.746.1

1417103.1147.3108.8

3. Industry and commerce

66.6 85.9 107.0 205.7

25.2 36.4 52.7 80.3

95.9 157.2 197.7 361.9

4. Investment companies

31.12.71­30.6.72 0.33 4.0 32.4 47.4 52.4 56.2 76.8

30.6.72­31.12.72 6.6 12.6 30.1 46.8 54.6 57.6 144.2o> 31.12.71­31.12.72 38.9 67.5 78.5 114.4 119.9 143.0 208.1נדיג­י1350

>* 5. Total companies listed on the Exchange0

j|j 31.12.71­30.6.72 ­5.2 12.3 28.3 48.3 76.6 97.7 205.7 53.7w"< 30.6.72­31.12.72 ­35.1 3.2 13.6 33.3 . 50.6 59.1 144.2 33.4wo£ 31.12.71­31.12.72 ­10.5 38.5 68.2 105.3 135.8 175.3 361.9106 8

ff 31.12.70­31.12.71 ­22.0 5.3 17.4 33.3 44.2 71.2 160.0 38.7

S 31.12.69­31.12.70 ­35.1 ­25.8 ­16.5 ­3.1 6.3 20.3 64.3 ­2.350W .£j " According to the composition of listed capital, at market prices, at the end of the previous year.

b According to the composition of trade in the year for which the calculation is made, less the data for 1972 calculated on the basis of the 1971composition.

>£ c Includes several stocks that are not classiifed under any of the four above­mentioned groups.h­ Source: Bank of Israel calculations.

7811367.143.0

7510830.848.3

75108112.8109.8

7711144.934.8

76110­4.0­3.9

Figure XVII­2

SHARE TURNOVER ON THESTOCK EXCHANGE AND

OVER­THE­COUNTER MARKET,1971­72

(IL million(

140

120

100806040200

Stock Exchange trade as a percent 73 71

of total trade in equities

_W<6lff

58712

1971 1972

Source: Tel Aviv Stock Exchange.

groups, and was sharpest in banking,ifnance, and insurance (the largestgroup), where the ifgure plunged from62 to 35 percent. This development wasapparently due primairly to the lengthen­ing of the session devoted to trade in thevariables at the expense of the openingsession, and the greater contribution ofsmall investors to total trade in listedequities. The drop in the weight of over­the­counter transactions should probablybe regarded as a desirable development,as it strengthens the signiifcance of, andcredibility in, the pirces set on the Ex­change.A study of Table XVII­7 shows that,

according to all three measures ofthe average net yield on equity investment/6 there was a big improvement in1972 (ranging between 150 and 200 percent) , with the gain in industrials andcommercials and the land and development group being concentrated in the ifrsthalf of the year, and in the banking, ifnance, and insurance and the investmentcompanies groups in the second half. A comparison of the results yielded by thethree measures reveals that on an average the less heavily traded stocks hadthe lowest rate of return, while those with the largest listed capital were moreproiftable.17 Further evidence that this was an across­the­board boom andnot one conifned to afew .select groups is the fact that the yield for the lowestdecile jumped from 26 percent in 1970 and 5 percent in 1971 to 39 percent inthe year under review.The advance in share prices, and hence in the rates of return on equity in­

vestment, may be partly ascirbed to the relatively inelastic supply of newissues, due both to factors speciifc to the Israeli share market (see section 3b)and to objective circumstances, such as the fairly long peirod required for pre­pairng a new offeirng to the public.Along with the share market boom and the greater interest and participation

of the general investing public in the Stock Exchange, the year surveyed alsosaw some improvement in the investment services available to the public :

lc On the method of calculating the net overall rate of return, the signiifcance of eachof the three measurements, and the results of the calculations for 1969­72, see R. Zentler,"The Proiftability of Investment in Common Stocks on the Tel Aviv Stock Exchange,January 1969 to June 1972", Bank of Israel, Economic Survey, No. 41 (forthcoming).

17 With respect to some of the stocks there is a mutual relationship between their heavytrade and their relatively large listed capital; but since this does not necessarily apply to allthe stocks, both observations should be noted.

442 BANK OF ISRAEL ANNUAL REPORT 1972

two new brokerage ifrms were opened, there was an improvement in the scopeand quality of the statistical and other informational mateiral made availableto securities advisers and ^0 the public at large, a system was developed forthe automatic telephone reporting of Stock Exchange prices, and closed circuittelevision was installed in the main branches of the banks for reporting on StockExchange price movements.No essential modiifcations were introduced in the Stock Exchange's system of

trading this year, but in order to cope with the brisker volume of business withoutreducing the number of rounds of trade in the variables, more hours were devotedto such trade, with the result that one round could be held in the opening sessionand two or three more in the variables, thus enabling the public to respondduring the day's trading to developments both on the Stock Exchange and inthe economy as a whole.

Table XVII­8

DISTRIBUTION OF ORDINARY SHARES AND BONDS BY ANNUALTRADING VOLUME, 1972"

Bonds0shares"OrdinaryA 1

PercentNumberPercentNumberAnnualvolume

of totalofof totalof)IL'OOO(volumebondsvolumeshares

0.01850.0Not traded0.61680.0­Up to 490.9480.0­50­992.2560.0­100­2493.6420.11250­4996.3330.45500­999

35.0901.891,000­2,49925.0316.2142,500­4,99913.5814.6185,000­9,9993.6110.4810,000­14,9994.3114.7815,000­19,9995.0127.8820,000­39,9990.0­16.6340,000­59,9990.0­7.4160,000+

100.0664100.075Total

* The data for shares relate to trade in listed shares sold on the Stock Exchange (both onand off the lfoor) and in the over­the­counter market, while the data on bonds relate onlyto trade on the Exchange. The distribution of shares is by issuer only and not by individualissues; that is, all types of shares issued by a particular company are treated here as asingle unit. In the case of bonds, however, each series listed on the Exchange is treated as asingle unit.

" For a group breakdown see Appendix Table A­XVII­2 (in Hebrew only) .

" Excluding the Short­Term Loan.Source: Tel Aviv Stock Exchange.

CHAPTER XVII, THE SECURITIES MARKET 443

Examination of the daily indexes of ordinary share prices for the variousgroups shows that the most impressive advance was posted by land and develop­ment stocks (117.4 percent), while the smallest (apart from fuel and oil) wasin the finance and insurance group (82.8 percent). Pirces climbed steadilythroughout most of the year (apart from some softening in May, which wasmainly due to profit­taking­a typical development on any exchange after aprolonged advance­ and a standstill in November) . In addition, the trend wasfairly similar in all the share groups­ further evidence that every group sharedin the equity market boom rather than just a few selected pacesetting stocks.An outstanding feature this year was the relatively high turnover in most

stocks and their more equal contribution to total trading volume in comparisonwith previous years­ this too testifying to the all­embracing character of thedemand for equities in 1972 (see Table XVII­8).Table XVII­9 presents the stock of listed securities at the end of 1971 and

1972 and the changes which occurred in the year reviewed due to the develop­ments descirbed above.

(b) New share issues (primary market)

The mobilization of new equity capital on the Stock Exchange continuedupward in 1972 against the background of the boom in the secondary sharemarket. Flotations of shares and convertible bonds added up to IL 199 million,as against IL 53 million in 1971 and no issues whatsoever in 1970. Nevertheless,there was still some reluctance to raise capital through public offerings, asindicated by the lack of lfotations by new companies not yet listed on theExchange and the fact that most of the new issues were of share irghts or con­vertible bonds and not share offeirngs to the general public.The IL 199 million raised in 1972 consisted of IL 143 million in shares

and IL 56 million in convertible bonds and capital notes18 (see Table XVII­10),and, as mentioned above, was entirely accounted for by companies with sharesalready being traded on the Exchange. Banking institutions accounted for 82percent of the total new capital, the land and development group for 13 percent,and industrial firms for only 5 percent. This pattern, which was similar to thatof previous years, is explained by a number of factors. First, the vairous typesof financial institutions have been expeirencing a vigorous expansion of business,and since there is need­ and sometimes institutional pressure­to maintain acertain minimum ratio between equity and total assets, these institutions mustfrom time to time take advantage of a buoyant share market to raise additionalequity capital. Second, unlike industrial and other enterpirses, the financialinstitutions have no access to development budget funds or other sources of rel­

18 Capital notes are bonds with a low preference upon the dissolution of the company; in Israelthey have been issued by banking institutions, where deposits outrank loan capital in theevent of dissolution.

444 BANK OF ISRAEL ANNUAL REPORT 1972

atively cheap financing (other than what they can raise through financial inter­mediation). Third, the financial institutions have easy access to the primarysecurities market and also serve as underwriters ; as a result, their own lfotationexpenses are relatively low and they can therefore better ensure the success of theirissues. Finally, because of their relatively large size and the fact that they areaccustomed to use this method of raising additional equity capital, they are lesshesitant about deciding between stagnation or a private placement on the onehand and a public offering on the other. Furthermore, the paucity of family­owned financial institutions makes it natural for this group to turn to the Ex­change to raise capital.Industrial firms, in contrast, have a better alternative for raising capital,

namely soft Government development budget loans. In addition, there is areluctance in this sector for private companies to go public, with all that thisinvolves concerning the obligation to reveal information on the firm's operations,the intervention of new shareholders in management, etc.

Table XVII­9

SECURITIES LISTED ON THE TEL AVIV STOCK EXCHANGE,*AT PAR AND MARKET VALUES, 1971­72

(IL million(

Percentincrease or19721971decrease )­(End of period

MarketParMarketParMarketParvaluevaluevalue"valuevaluevalue

BondsLinked to the foreign

­12.074.9130.285.1exchange rate36.71,701.31,736.31,244.2Index­linked8.61,207.61,127.41,111.8Traded in foreign currency5.52,351.32,992.72,228.0Option­type

­67.12.616.87.9Mixed linkage97.7112.847.057.0Nonlinked15.15,450.56,050.54,734.0Total

Shares110.011.22,467.8986.01,175.0886.5Ordinary207.960.7105.041.334.125.7Preferred6.00.0226.3187.9213.4187.9Traded in foreign currency96.812.52,799.11,215.21,422.51,100.1Total

Does not include all the issues sold with a prospectus; among long­term index­linked bondsa large percentage are issued with a prospectus but are not listed on the Exchange. Adistinction should also be made between the amount of securities listed on the Exchange andthe actual marketable stock of securities, because of the existence of large blocks (held byindividuals and institutions) which are not for sale.Data on bonds had not yet been published when this Report went to press.

CHAPTER XVII, THE SECURITIES MARKET 445

Most of the 1972 lfotations fared quite well on the Exchange, being com­pletely subscirbed and with their shares commanding a higher pirce in thecase of rights issues and with oversubscirptions and a price rise in the case ofoffeirngs to the general public. The bulk of the equity capital was raised throughshare issues (72 percent of the total), with convertible bonds providing thebalance. Resort to the latter began in 1971 and increased duirng the year re­viewed, when six of the 12 companies mobilizing capital on the Exchange didso by way of convertible bonds, which produced a total of IL 56 million. Thisinstrument has three pirncipal advantages, one of which favors the investor andthe other two mainly the issuer. First of all, as far as the investor is concerned,this type of paper is less risky than a share, but its long­run prospects arehardly affected thereby.19 Second, for a company whose shares are already beingtraded on the Exchange, a convertible bond issue is likely to fare better than ashare issue. If it lfoats a new share issue, those already owning the company'sstock will not necessairly increase their holdings, while the appearance on the mar­ket of convertible bonds, with different characteristics from those of the com­pany's shares, alters the optimal portfolio composition and usually makes itworthwhile to purchase them. Finally, in the initial years the current paymentson such bonds constitute a deductible interest expense, and not a nondeductibledividends payment.

Table XVII­10

NEW SHARE AND CONVERTIBLE BOND ISSUES, BY GROUP, 1971­72

(IL million(

19721971

Con­Con­Percent

oftotal

Totalvertiblebondsandcapital

SharesPercent

oftotal

Totalvertiblebondsand

capitalSharesGroup

notesnotes*

Banking institutions)incl. holding

57.5114.630.084.667.335.525.010.5companies(Other ifnancial

24.648.913.035.924.212.8­12.8institutionsIndustry and

5.010.06.04.08.54.52.02.5commerce12.925.77.018.7­­­­Land and development

100.0199.256.0143.2100.052.827.025.8Total

19 A certain premium has to be paid for this relative to a regular bond investment.

446 BANK OF ISRAEL ANNUAL REPORT 1972

Eleven of the 12 new equity issues in 1972 were of stock irghts to holdersof record, with only a single company making an offering to the public. Thereare three principal reasons for raising. equity capital by way of a rights issue.First, some companies are legally bound by their articles of association to floatnew equity issues only in the form of stock rights. The second reason is toenable existing stockholders to retain their share in total capital and thus controlof the firm, even if this is not explicitly stipulated in the articles of association.The third reason is to ensure the success of the issue, for the irghts enable theexisting stockholders to acquire new shares for less than the market pirce, therebyproviding an incentive for them to exercise their irghts. Given the conditions ofthe Israeli market, it seems that the dominant motivation has been a com­bination of the legal obligation and the desire to ensure the success of thelfotation. Another feature of many of the 1972 equity issues was the offeirngof part of the issue to the company's employees on preferential pirce andcredit terms. This practice grew more widespread this year owing to the boomand the high rate of return on listed stocks, which enhanced the readiness ofemployees to accept part of their wage increments in this form, while thecompanies were interested in letting their workers participate in the ownership,thereby giving them a bigger stake in the concern.The convetrible bond issues, on the other hand, were offered to the general

public, rather than in the form of irghts issues, but in some cases there was apreallotment to preferred investors (generally institutional). This was due to thedesire to enable affiliated institutional investors to share in the profits of thelfotation, and to ensure a nucleus of institutional investors­a desirable situationin times of stock market slump and crisis. As mentioned above, this sectiondeals with the mobilization of equity capital by companies listed on the TelAviv Stock Exchange, with the shares offered either to all stockholders of record(by means of irghts issues) or to the general public. At the same time, it shouldbe noted that in 1972 several listed firms made pirvate placements either topart of their stockholders or to outsiders by piror arrangement. These lfotationsare not included in the above data, and the shares involved are generally notlisted for trade on the Exchange.In 1972 Government policy regarding the desired company financing struc­

ture, especially of industrial concerns, moved futrher in the direction of a dimin­ished reliance on subsidized directed loan capital and a greater resotr to theStock Exchange for raising investment capital. But apatr from moral encourage­ment, no substantive steps have yet been taken to implement this policy (e.g.patricipation in lfotation costs, tax concessions, according preference to ifrmsraising capital through the Exchange by granting, them subsidized supplementaryloans, etc. ).

Finally, it should be noted that this year more Israeli companies lfoatedshare issues abroad, especially in the U.S.A. There were six such issues, totallingIL 200 million, compared with a single IL 34 million issue in 1971. Some of

CHAPTER XVII, THE SECURITIES MARKET 447

these shares are traded in the over­the­counter market, while others were probablyissued under partnership agreements and are not held by the general investingpublic abroad.

4. Short­Term Loan

The outstanding balance of the Short­Term Loan rose by only IL 32 million,or 4.4 percent, in 1972, after increases of IL 157 million and IL 93 millionin 1971 and 1970 respectively. The deceleration in the year reviewed coincidedwith a rapid monetary expansion and the growth of other short­term nonlinkedfinancial asset holdings (both time and demand deposits were up 31 percent) .

There were three principal factors behind this development : (a) the continuationof the inlfation and its exacerbation toward the end of the year (see section 2),which induced a shift from unlinked to linked assets; (b) the decline in theShort­Term Loan yield relative to that of other nonlinked financial assets andlinked assets, including those with a short term to maturity; and (c) the tightliquidity situation which developed toward the end of the year and apparentlyprompted bank investment advisers to push time deposits rather than the Short­Term Loan. In 1972 as well, the yield on the Short­Term Loan lagged behindthe rise in the consumer price index, so that there was a negative real rateof interest on this paper.The amount of funds absorbed from the public through the Short­Term Loan20

showed an even more drastic change in 1972, dropping from IL 87 million in1971 to IL 55 million. In other words, not only did the Short­Term Loan failto help check the monetary expansion in the year reviewed, but by generatingan external infusion of IL 55 million it further stimulated it.The tendency for the Short­Term Loan to become less a capital market

and more a money market instrument continued in the year reviewed. Theunderlying cause of this development is the prolonged rapid rise in the generalprice level, which has strengthened the propensity to acquire financial assets( notably linked bonds and shares) as a hedge against inlfation. This developmenthas been relfected by a steady decline in the weight of Loan series maturing inone year or more­ from 37.7 percent of total holdings of this paper at the endof 1969 to 25 percent at the end of 1970, 21.8 percent in 1971, and 18 percentin the year reviewed. A breakdown of the composition of new sales of the Short­Term Loan­a variable more sensitive to changes in the public's demand thanthe composition of the outstanding balance­­ points up this phenomenon evenmore sharply. Whereas gross sales of the three­month series expanded by 54percent and those of the six­month series by 21 percent, the one­year seriesshowed no increase at all, and the 1 8­month series plunged 35 percent.

20 Absorption by way of the Short­Term Loan is deifned as the difference between thepublic's incremental holdings on the one hand and interest payments and the disagioon the other; it represents the net proceeds from sales of this paper.

448 BANK OF ISRAEL ANNUAL REPORT 1972

Table XVII­11

SHORT­TERM LOAN HELD BY THE PUBLIC, BY REDEMPTION DATE, 1971­72

(IL million(

NumberChangeduring,1972Dec. 311, 1972Sept. 3C1972"July 6­,1972Mar. 311971Dec. 31,

ofdays

1972)ILm.(>7oILm.ILm.ILm.>Y0ILm.ILm.to

redemp­tion

46.558.2436.058.4470.256.4447.154.4414.054.3389.5Up to 916.823.8178.124.3195.425.3200.325.5194.123.9171.398­182

­14.816.1120.315.6125.916.5130.617.9135.818.9135.1189­364­7.01.913.91.714.01.814.42.217.02.920.9371­54631.5100.0748.3100.0805.2100.0792.4100.0760.9100.0716.8Total

a There are no data for June 30, 1972.Source: State Loans Administration.

The rising trend in Short­Term Loan holdings weakened in the course of 1972,until it tapered off and even turned sharply downward in the last quarter. Thebalance rose by IL 44 million in the first quarter, IL 31 million in the second,and IL 13 million in the third; after peaking in October at IL 817 million, itdropped by IL 70 million to stand at IL 748.3 million at year's end (see TableXVII­1 1 ).Stock Exchange trade in this paper expanded by 42 percent to reachIL 213

million ; the lion's share represented Bank of Israel open­market operationsaimed at propping up the yield level and sales. Most of the public's trans­actions in the secondary market are executed by brokers on own account : as aseries approaches maturity, the latter buy up all the certificates put on the market(which generally constitute a large percentage of the total outstanding balance ofthe series, since the brokers offer the investors the full net proceeds several daysbefore official redemption date). It follows that the brokers do not permit anycurrent trade in this paper on the Stock Exchange.

5. Compulsory Loans

Compulsory loans levied on the public brought in IL 1,181 million in 1972,compared with IL 1,041 million the year before. Redemptions of loans imposedin the past (including the Absorption Loan and the 1967 Defense Loan) addedup to IL 635 million, as contrasted with IL 105 million in 1971. (The questionof how to treat this loan, including the reinvestment of redemption proceeds, isdiscussed in section 2.)The compulsory loans cannot be regarded as part of the primary securities

market, but they do account for part of the total capital mobilized in the

CHAPTER XVII, THE SECURITIES MARKET 449

economy and to some extent have supplanted purchases of ordinary secuirties.21The IL 1,181 million compulsory loan receipts in 1972 were collected on twotypes of loans: IL 588 million on the Defense Loan and IL 593 million on theSavings Loan (collection of the latter loan from employees was terminated inApril 1972). As the receipts from these two levies are determined by the level ofwage income and proifts, they rose along with the latter two vairables. But be­cause of the discontinuation of collection of the Savings Loan from employees,total compulsory loan proceeds lagged behind the growth of these two variables.In 1972 certiifcates were distirbuted as follows : IL 122 million­ 1970 De­

fense Loan; IL 63 million­ Savings Loan; IL 52 million­ 1967 AbsorptionLoan; IL 106 million­ 1966 Absorption Loan; and IL 2 million­ earlier Ab­sorption Loan series.It should be noted that the 1970 Defense Loan and the Savings Loan are not

negotiable (either on or outside the Stock Exchange), and hence they have nodirect beairng on either the pirmary or the secondary market. But by affectingboth the disposable income of households and their wealth (as distinguished fromnegotiable ifnancial assets), they do have an indirect effect.Besides the compulsory loans, which are levied on all persons paying income

tax, IL 1 29 million was collected on account of the Defense Loan issue to banks.Adding this item brings the total amount of capital raised by the Governmentthrough compulsory loans up to IL 1,350 million, compared with IL 1,142 mil­lion in 1971.

6. Securities Traded in Foreign Currency and the Natad Market

Activity in securities traded in foreign currency slackened in 1972, owingto the August 1971 devaluation of the Israeli pound and the enormous expansionof the country's foreign currency reserves­ which eliminated expectations ofanother devaluation of the IL in the near future­ and also because of theweakening of the U.S. dollar in the world's money markets. Net receipts fromIsraeli secuirty issues denominated in foreign currency plummeted from IL 87million in 1971 to a mere IL 19 million, while the balance of Natad depositsand foreign currency security holdings went up by $ 32 million, after soaring$ 77 million in 1971. The agio on the Natad dollar was very close to zero (0.7percent­ the commission charge on such transactions) throughout most of theyear. Such was the situation in spite of the upheavals which shook the world'scurrency markets at the end of the previous year and the feeling that equilibirumhad not yet been restored­a development which should have enhanced interesthere in secuirties traded in foreign currency, if not from expectations of achange in the external value of the Israeli pound, then from the anticipation of a

21 For a more detailed discussion of how compulsory loans are treated in the analysis of thesecurities market, see Bank of Israel, Annual Report 1970, p. 394.

450 BANK OF ISRAEL ANNUAL REPORT 1972

change in the major world currencies. However, it should be noted that thisslackening of activity occurred against the swelling in recent years of Pazak andTamam accounts due to nonconversion of all the receipts and­ even more im­portant­to the revaluation of several European currencies and the devaluationof the U.S. dollar and Israeli pound. To be sure, these accounts are not negotiableand not everyone may hold them, but because of their wide ownership they serveas a substitute for securities traded in foreign currency, and it is a reasonableinference that they have had a moderating effect on the demand for securitieslinked to or denominated in foreign currency.

Table XVII­12

NET PURCHASES" OF FOREIGN CURRENCY SECURITIES OUT OF TAMAMAND NATAD FUNDS, 1970­72

($ million(

1972

ListedabroadHollisListed

in IsraelTotal"19711970End of peirod

Net purchases0.4­0.11.41.75.12.7January­0.10.6­0.6­0.13.95.0February­0.30.5­0.5­0.30.80.7March­0.30.1­0.9­1.14.66.0Apirl1.20.45.57.13.45.2May

­0.50.34.64.45.25.7June0.10.04.04.15.13.9July­0.50.13.02.61.92.4August­0.6­0.10.70.02.52.5September­0.10.0­0.4­0.52.13.1October0.70.6­1.00.30.92.7November­0.40.31.41.33.16.2December­0.42.717.219.538.646.1Total net purchases

Revaluation"12.44.221.738.373.013.1Total increase in holdings

81.492.4189.8363.6325.3252.3Holdings at end of period

" Total securities purchased, less total securities sold during the period.b Includes $ 1.0 million differentials due to changes in foreign exchange rates." The differential arising from the revaluation of the portfolio according to the pirces at theend of March (or May); does not include the increment arising from changes in foreignexchange rates.

Source: Based on data of the Foreign Exchange Department, Ministry of Finance.

The outstanding balance of securities traded in foreign currency held by Israeliresidents came to $ 364 million at the end of 1972, with issues of Israeli in­stitutions (including Hollis) accounting for 75 percent of the total and foreign

CHAPTER XVII, THE SECURITIES MARKET 451

­FigureXVII3THE AGIO ON THE NATAD ANDFREE­MARKET DOLLAR, 1966­72

(percent change(

securities for only 25 percent. The scales were even more heavily tilted in favorof the former in the 1972 growth of the portfolio : whereas net sales of new Israeliissues came to $ 19.9 million, there was a mere $ 400,000 trickle in the case offoreign securities (see Table XVII­12). But since the exchange rate differentialson the latter amounted to $ 12.8 million, as opposed to $ 6.0 million for theIsraeli secuirties (including Hollis), the foreign secuirties accounted for $ 12.4million of the $ 38.3 million portfolio increment. From the aforegoing it may beconcluded that the demand for foreign currency secuirties stems primarily notfrom a desire to trade on foreign stock exchanges or to geographically diversifyinvestment portfolios, but from the investors' desire to hedge themselves againsta change in the external value of the Israeli pound.

The subsidising of demand for foreigncurrency securities was undoubtedly alsodue to the irse in nominal yields on bondsand especially stocks denominated in Is­raeli currency, and perhaps also to thefurther liberalization of foreign currencycontrol, which has enlarged the array offoreign currency assets Israelis may hold.As a result of these developments­

which dampened demand for Natad dol­lars and led to a greater conversion ofcurrent personal restitution receipts andTamam funds, thereby augmenting thesupply of Natad dollars­ the pirce of theNatad dollar hovered duirng most of theyear at a low of IL 4.23. Only fromJune through September, when conver­sions fell off and demand for foreign

securities and ifnancial assets denominated in or linked to foreign currencypicked up somewhat, did the Natad rate edge up to reach a monthly averagehigh of IL 4.32 in July. A currency breakdown of the Natad deposits strengthensthe conclusion that these accounts served to only a minor extent as an instrumentfor speculating against the dollar, for 78 percent of the end­1972 balance wasdenominated in dollars.22 It thus appears that the agio on the Natad dollar ispirmarily inlfuenced by expectations regarding the external value of the Israelipound and not by a desire to participate in the worldwide speculation againstvairous currencies­ which an Israeli can do legally through the Natad market.

22 At the end of 1971 the weight of dollar­denominated securities was 93 percent. The declinein the year reviewed may be attributed to the influence of the currency market upheavals,which resulted in half the Israeli foreign currency issues being denominated in Swiss francsrather than dollars, as well as to the increments arising from the various exchange ratechanges this year.

fl­­ ^­ Natad dollar

­ ­ Free market30)ofliar

Aug. 1971/Nov. 196725devaluationy/ 'devaluation

AV/­20

!..ך1 !15 \rI .'A\­ 1'­.''10

A( /VJ­A/5

'­­wi\\LA­C1

u01966 1967 1968 1969 1970 1971 1972

.Source:State Loans Administration

452 BANK OF ISRAEL ANNUAL REPORT 1972

­Table XVII13

NATAD AND FREE­MARKET DOLLAR RATES, NATAD BALANCES,AND HOLDINGS OF SECURITIES TRADED IN FOREIGN CURRENCY, 1971­72

($ million(

19721971

Agioonfree­marketdollar('tf)

Free­marketdollarrate

)monthlyaverage"))IL)

Agioon

Nataddollar)7o)

Nataddollarrate

)monthlyaverage")

)II.)

TotalNatadbalances

Securitiestradedin

foreigncurrency

Agioonfree­

marketdollar

Free­marketdollarrate

)monthlyaverage"))It)

Agioon

Nataddollarw

Nataddollarrate

)monthlyaverage*))II')

TotalNatadbalances

Securitiestradedin

foreigncurrency

5.74.440.74.23347.820.8327.09.23.8218.64.16274.216.9257.3JanuarynX<

5.04.410.74.23344.918.0326.98.93.8117.94.13278.617.4261.2February3

4.24.380.74.23346.620.0326.67.93.7815.94.06319.923.4296.5March"50

4.24.380.74.23345.119.6325.57.93.7815.14.03322.721.5301.2April

5.24.420.74.23369.510.1351.46.23.7212.03.92327.623.0304.6MayHX

7.14.501.94.28373.017.2355.85.73.7010.83.88331.621.9309.7Junew

6.24.462.94.32375.715.8359.95.73.7010.03.85336.321.5314.8Julywo

5.04.411.44.26370.315.8362.52.04.292.64.31338.722.0316.7AugustG

5.04.411.04.24377.815.3362.51.84.271.04.24343.524.3319.2Septemberנ/)

5.24.420.74.23377.415.4362.01.94.280.74.23342.921.6321.3October

6.04.450.74.23377.214.9362.36.44.471.14.25342.420.2322.2November<

6.64.480.74.23379.616.0363.67.64.521.94.28347.622.3325.3December

Finance.linistrv ofment. Alanee DeDartn Exciincrementsand Foreisr

a Thursday averages.b Including revaluationSource Bank of IsraelCO

The agio on the free­market dollar was also relatively low during 1972,slipping to an annual average of about 5.5 percent. This is attributable primarilyto the absence of expectations of a devaluation of the Israeli pound; how­ever, the sources of supply and demand in this market are more diversified, sothat the changes in the agio may also have been due to other factors. A glanceat FigureXVI1­3 reveals a very interesting phenomenon : although the agio onthe free­market dollar did not move parallel to that of the Natad dollar inrecent years, their paths crossed at only two points, both after a devaluation ofthe Israeli pound.

454 BANK OF ISRAEL ANNUAL REPORT 1972