Last week was the dramatic week in which the Knesset passed the law curbing judicial administrative review by abolishing the reasonableness standard for ministerial and government decisions. In an unprecedented move, the Israel Business Forum closed businesses in protest against the law, without coordination with the Histadrut (General Federation of Labor in Israel). The Knesset was surrounded by demonstrators, with protests taking place elsewhere in the country as well, and behind the scenes, in fact not just behind the scenes, there were feverish negotiations on softening the law. But the negotiations failed, the law passed in its original format, and the Tel Aviv Stock Exchange responded by falling by more than 5% on Monday and Tuesday last week. Since then, however, stocks have recovered, and the indices have resumed their rise.
In the end, despite the political chaos and the fluctuations on the local market, July was crowned as the best month on the Tel Aviv Stock Exchange in the past year. The Tel Aviv 35 Index climbed almost 7%, while the Tel Aviv 125 Index was up by almost 6%. All this while the S&P 500 rose just 3%.
The only Tel Aviv Stock Exchange index to fall last month was the Insurance Index, which ended the month down 1.5%.
For all the celebrations, if we zoom out, we can see that July’s rises were still a long way from correcting the upsets on the Tel Aviv Stock Exchange in previous months. While the Tel Aviv 35 Index has risen 4% in the year to date, the S&P 500 has risen by almost 20%, and the Nasdaq 100 by 37%. Elsewhere in the world, the trend is similar. In Germany, the DAX index rose by just 2% in July, less than the equivalent Israeli index, but it has put on more than 18% so far this year. The picture is similar in Japan, where the Nikkei 225 fell by 2.7% in July, but is up by nearly 23% for the year to date.
Moreover, on the foreign exchange market, the picture is less rosy. Although the shekel staged an impressive recovery against the US dollar in the course of last month, with the shekel-dollar rate reaching as low as NIS 3.56/$, in the final days of the month the rate surpassed NIS 3.7/$, and the recovery was wiped out.
Roi Kadosh, chief investment manager at Hachshara Insurance, told "Globes", "It seems that, against our will, we have bought a ticket for a rollercoaster. Around the date of the passage of the law restricting the use of the reasonableness standard, on July 24, there were stormy trading sessions in which we saw rises and falls of 4-5% in a day in the Banks Index. The shekel-dollar rate also rose sharply, and fell back."
Kadosh pointed to the source of the volatility: "On a daily level, as far as I was able to tell, it was more a case of retail activity (the general public, H.S.), and less of significant moves by financial institutions."
"Overseas investors already price in a rating downgrade"
Kadosh says that one factor that has affected the market has been the reports by the international rating agencies published immediately following the legislation that warned of the consequences of the legal reform. "I believe that Fitch will also publish a report shortly, perhaps even in the next week. I think that the reason that the market has stabilized since the publication of the latest report is the assessment that the next stages of the legislation will be carried out by agreement. There’s a prospect of the centrist forces in politics coming together in a unity government, and that could calm things down. At the moment, however, everything is random."
Kadosh says that, despite Israel’s financial stability, one of the rating agencies is liable to respond harshly to the passage of the legislation. "I personally think that Israel really is liable to find itself in an event vis-a-vis one of the rating agencies, whether a downgrade of the rating itself or of the rating outlook," he says. "The flags that the agencies have raised are by now not a ‘yellow card’, but more of a ‘nearly red card’. Despite Israel’s ability to service its debt, I fear that one of the agencies will in fact revise the rating outlook. That’s something liable to happen in the next three months."
Robert Carmeli, chief investment officer at Four Seasons Wealth Management, told "Globes", "A downgrade of Israel’s credit rating is now being priced in overseas. Israel’s risk premium on international markets has already risen and reflects this.
"A rating downgrade for Israel will be a catastrophe," he added. "US banks currently give 5% interest on deposits. In Israel, we’re already at 7%. If there’s a rating downgrade, we’ll reach interest rates of 8-9%, which is a catastrophe."
A conversation with a source at a financial institution, who asked to remain anonymous, raises the theory that the stock exchange will be in waiting mode in the coming months. "In general, there’s no doubt that there was a month of handsome rises on the stock exchange, although the shekel didn’t recover so much. Many of the institutions decided to act in a measured way on the stock exchange. It would appear that the pricing gap between stocks in Tel Aviv and in the rest of the world has run its course.
"To me it’s clear that we shall continue to be traded completely in step with developments on the political front, and world developments will also play an important part. After the positive correction in July, I don’t think that in the coming months we’ll outperform the main indices around the world, as long as we don’t see some significant change in the political situation in Israel.
"There will be two to three months of quiet on the political front. It’s summer, and from mid-September we’ll have our holiday season, so trading volumes will decline."
Carmeli too sees things quietening down over the next few months, but he calls it a "tense quiet." "The prime minister said that there was a timeframe for the matter. He said that they would either reach consensus by November, or else pass the legislation. In my view, he climbed down, but the political front will be back with us in another three months’ time," he says.
On interest rates, Carmeli adds: "If we continue to see the local inflation rate subsiding, in my opinion the Bank of Israel will not raise its interest rate in its next decision (on September 10). The following decision, in October, is also likely to be for no change."
Published by Globes, Israel business news - en.globes.co.il - on August 1, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.
Published by Globes, Israel business news - en.globes.co.il - on August 1, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.