MSCI, the creator of stock market indices, decided to change Israel’s classification from an emerging market to a developed market. I have no opinion on the classification either way, but mutual funds dumped large amounts of Israeli stocks because of the change. Apparently, Israel stocks now only represent 0.4% of MSCI’s developed market index. Thus, investors may be able to ignore Israel altogether and not worry too much about meeting their benchmarks. On the other hand, Israel stocks had represented 3.0% of the emerging market index – a tougher percentage to ignore. Thus, the reason for the selling by mutual fund managers investing in emerging markets and the reason for lack of buying by mutual fund managers investing in developed markets, which, of course, led to a decrease in Israel stock prices.
While the loss of Israel stock market value seems to make sense on a 30,000 foot view, what about the actual companies that comprise the Israel stock market? Why did their individual values decrease merely because their entire country got an upgrade, so-to-speak? I think this is another example of the differences between price and value in the world of investing. Price wins in the short-term and, hopefully, value wins in the long-term. We will have to wait and see in Israel anyways.