Bank of Israel plans to double stock holdings

The Bank of Israel plans to almost double equity holdings by the end of the year after falling bond yields prompted the central bank to invest in European shares for the first time.

The bank will increase its stock holdings to as much as 6 percent of foreign-exchange reserves, or about $4.5 billion, from 3% at the end of 2012, according to Yossi Saadon, a Bank of Israel spokesman. Investments in shares rose to about 4.5% of assets in the first four months of 2013 as the institution made a “small allocation” to European equities in addition to its US funds, he said.

“The basis for the decision to invest in equities is the expected equity-risk premium over bonds,” Saadon wrote in an emailed response to questions last week. “The goal of this move is to improve the return to-risk ratio of the reserves.”

Central banks around the world are looking for alternatives to holding government bonds after efforts to stimulate growth from the Federal Reserve, the Bank of Japan and the Bank of England helped send yields near to record lows. Banks’ foreignexchange holdings have increased by about $8.5 trillion globally in the past decade, exceeding levels needed for day-to-day currency administration.

In a survey of 60 central bankers by Central Banking Publications and Royal Bank of Scotland Group Plc released last month, 23% said they own shares or plan to buy them. The Bank of Japan, holder of the world’s second-biggest reserves after China, said April 4 it will more than double investments in equity exchangetraded funds to 3.5 trillion yen ($36b.) by 2014.

The Bank of Israel bought equities for the first time in March of last year, according to Saadon. The initial purchases were made through UBS AG and BlackRock Inc. The bank’s investments are in passive funds tracking broad MSCI indexes, including companies like Apple Inc.

“There has been talk for a long time that they needed to diversify out of Israel,” said Uri Landesman, president of New York-based hedge fund Platinum Partners, which manages about $1.2b. “I’m not thrilled with the European equity market this second, but when a central bank makes a move like this, it’s not a day trade. They’re not going to reverse themselves overnight. (Bloomberg)