Israel and the world economy are hurtling into an economic slowdown, with unemployment set to climb, but inflation, which has soared in 2022, expected to moderate in 2023. The economic forecasts prepared for 2023 published by Bank Hapoalim's research department and Israel Discount Bank's financial markets division see the economic slowdown further developing, while proposing ways in which investors can protect themselves.
2022 has seen sharp price drops in the indices on the stock exchanges including in blue chip investments and bonds. In the US, inflation jumped to a record rate of 9.1% in the summer, and has weakened since then. In Israel, Bank Hapoalim estimates annual inflation of just 2.5% in 2023. The "sticky" part of inflation (the one that arises from demand, reflecting the rise in prices of services) will decrease only gradually in their estimation, and will force the Bank of Israel to leave the interest rate at its high level for some time.
Israel Discount Bank says that inflation in 2022 will be 5.5% moderating to 3.3% next year and 2.7% by the end of the year.
One of the factors that will influence inflation will be the housing sector, which "will continue to represent a significant factor in inflation although it is expected to moderate due to the anticipated rise in unemployment, erosion of real salaries and the rise in housing supply (due to the rise in building finishes)."
In addition, Discount Bank predicts, "Inflation in the coming year will be significantly affected by the government's measures, including scrapping the tax on soft drinks and disposable utensils, the hike in electricity and water rates and public sector wage agreements." The market, however, is pricing in inflation that is slightly lower than its forecast, at a rate of 2.8% for the entire year according to the bank.
Bank Hapoalim sees interest rate hikes continuing in 2023 but at a more moderate rate than this year's aggressive rate rises.
In the US interest rates are expected to reach 5% while in Israel the Bank of Israel Monetary Committee is expected to lift rates to between 3.7% and 4% by the end of the first half of 2023, with two or three more 0.25% rate hikes.
Bank Hapoalim says that on the assumption that inflationary expectations will fall to 2.5%, the Bank of Israel's interest rate is expected to reflect a real rate of 1.5%.
The banks see bad news in the job market. Discount estimates that the low unemployment that has prevailed over the past two years since the recovery from the Covid pandemic in 2021 will significantly change.
The economists say, "The cracks found in growth in the economy over the past few months will spill over into the job market and we already saw unemployment rise to 3.9% in November while participation in the workforce and employment market fell."
Discount adds that a fall in job vacancies has already been seen with the tech service sector especially prominent in this fall. In their estimation, unemployment will rise towards 5%.
Regarding GDP growth in the Israeli economy in 2023, Bank Hapoalim sees growth of 2.5%, reflecting low GDP per capita growth of just 0.5%. Hapoalim's economists say, "We have already been in a similar growth situation in the second half of 2022, so it is difficult to say that this is an additional significant deterioration compared with the current situation."
Discount believes that with the Israeli economy growing by an estimated 6.2% in 2022, there will be 2.5% growth in 2023 with the two main engines of growth prior to the crisis - private consumption and high tech - expected to suffer from weakness.
"Potential for creating a stock market correction in 2023"
Despite predictions of an economic slowdown, there are also some bright spots. Hapoalim believes there is potential for price rises on the stock market. "The across-the-board and aggressive decline in multiples over the past year in growth stocks has led to the creation of a potential for correction in 2023," Hapoalim economists say, adding that this is especially possible, "among established growth companies, with stable cash flow and low debt."
But due to quite a few risk factors in the stock markets and the economy, Hapoalim stresses the need for risk management through a combination of value stocks with a significant weight, in order to reduce the level of risk and volatility in investment portfolios.
Hapoalim says that in Israel's debt market there may be a recovery and decrease in bond yields, and recommends investing 45-55% of portfolios in shekel options. In the global debt market, Hapoalim recommends focusing on short-term government bonds and investment-grade corporate bonds, although emphasizing that high yields, which look attractive in the short term, do not compensate for inflation.
Hapoalim believes that the coming year will be challenging for companies. "Damage to the profitability of the companies is anticipated due to interest rate hikes in the US to a restraining level (around 5%), and estimates are that the shift to interest rate cuts is still far away, and expected only towards the end of 2023. However, since the financial markets are strongly influenced by expectations, any attempt to anticipate the markets could end in a loss, and the recommendation is to build a balanced and diversified portfolio, which includes growth stocks (tech and industry) alongside value stocks (healthcare, value stocks and the Dow Jones index), according to the client's risk level."
Hapoalim recommends, "Share composition should preferably be invested through stock picking rather than indices and that the component allocated to indices should focus on large share indices (Tel Aviv 35 Index) with a higher weighting of value share than indices (Tel Aviv 90 Index) built around small and medium enterprises (SMEs).
Teva and ICL among recommended stocks
Among the stocks recommended by Bank Hapoalim are Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA, which has just appointed a new CEO. The company is expected to leave the opioid legal affair behind it and record growth in its innovative activities, with a rise in revenue from its branded drugs Ajovy and Ostedo, to compensate for fading Copaxone sales.
Another recommended stock is ICL (TASE: ICL: NYSE: ICL), which manufactures potash and which has benefitted from the rise in commodity prices. Hapoalim sees the company reporting strong results for 2023, although down from 2022, when potash prices rose above $1,000 per ton, due to the Russia-Ukraine war. But Hapoalim says that such prices are not sustainable over time.
In the income producing real estate sector, Hapoalim says that in 2022 companies achieved, "Strong operational results from their activities on the domestic market, which stemmed from the rise in occupancy rates, real rents, the rise in the index, the cancellation of Covid restrictions and the fall in real interest rate expenses."
However, Hapoalim adds that the office leasing market is, "Beginning to creak from the influence of the tech slowdown." Looking ahead Hapoalim warns, "The damage to households' available income due to the rise in interest rates might begin to be expresses in the coming year in tenants' revenue and the results of shopping malls and commercial centers."
Hapoalim adds, "The office sector may experience a fall in demand in the coming year when faced by a significant increase in the square meter supply of offices in the coming year." Among the recommended stocks in the sector are Azrieli Group (TASE: AZRG) and Melisron Ltd. (TASE: MLSR), and among stocks with activities abroad is Alony Hetz (TASE: ALHE).
Published by Globes, Israel business news - en.globes.co.il - on December 29, 2022.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.