"The Bank of Israel is inflating an asset bubble," claims Excellence Nessuah analyst Terence Klingman. He was commenting on the central bank's very low interest rate, which is driving investors to buy stocks and apartments.
For the first time, Klingman used the word "bubble" when discussing housing prices. At the same time, he raised his recommendations for Bank Hapoalim (TASE: POLI) and Bank Leumi (TASE: LUMI) to "Buy", and predicts a 50% upside for both shares.
"It's no longer possible to ignore the signs of a growing assets bubble," says Klingman. He believes that the asset bubble is greatest in the real estate market, where, despite rising unemployment and the contraction in GDP, prices are rising because of the negative real interest rate.
Israel is one of the few countries with relatively high inflation but a negligible interest rate. The real estate bubble is drawing the attention of the Bank of Israel, and the deputy governor has admitted that the housing item in the Consumer Price Index (CPI) was unexpected. Klingman says, "We believe that the bubble has spread to other assets, such as certain corporate bonds, and even government bonds."
In order to deflate the bubble before it bursts, Klingman says that the Bank of Israel has two choices: either ignore the growing bubble, or to gradually raise the interest rate "to let the air out of the balloon". He advises to begin raising the interest rate as soon as possible.
"The last crisis in the US teaches us that we must not ignore an asset bubble," he says.
Klingman says that regardless of whichever steps the Bank of Israel takes, the commercial banks will profit. If the Bank of Israel decides not to pop the bubble and keeps the interest rate low, the banks' provisions for doubtful debts will fall to a level that the market has not priced into their shares. On the other hand, if the Bank of Israel raises the interest rate, the banks' financial spreads will widen giving them a huge accounting profit derived from the CPI.
Published by Globes [online], Israel business news - www.globes-online.com - on July 22, 2009
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