After steep falls in the main share indices in the three weeks following the outbreak of war between Israel and Hamas in the Gaza Strip, the trend has changed this week. In the first two sessions, the Tel Aviv 25 Index rose by some 3%, although it fell back slightly yesterday.
The most prominent decliners yesterday were the banks, following the report that the Bank of Israel was mulling a halt to dividend payments by the banks, or restrictions on them. The TA-Banks5 Index has fallen by 14% since the start of the war.
Local market players explained the rises on Sunday and Monday in several ways, from the fact that the fighting on the southern front had not spread to other sectors, to a coming to terms with how much it will cost the economy, to the rises at the beginning of the week on Wall Street.
Institutions increase exposure to stock market
The Tel Aviv Stock Exchange’s VTA35 "fear index" more than doubled between October 7, when the Hamas incursion into southern Israel took place, and the end of the month, reaching its highest level since March 2020, when Russia invaded Ukraine. The index did however moderate slightly in the final days of the month.
Trading volumes in most instruments in Tel Aviv last month were similar to or lower than the average for the year to date. "Since the start of the war, private Israeli investors and foreign investors have reduced their exposure to the stock market. On the other side, investment institutions investing for the long term increased their exposure," market sources said.
Psagot Mutual Funds CEO Eyal Goren told "Globes": "The war that broke out was a ‘black swan’ that brought a great deal of uncertainty, fear, and anxiety in every aspect of people’s lives. This seeped from personal life into investment portfolios. People acted in an extreme way, and this is what sent the share indices down between 10% and 15% at the start of the campaign. In the past few weeks, the institutions have substantially raised their exposure to Israeli stocks, particularly to the banks and Tel Aviv 125 Index stocks. In the past few days, the public has come along, after the institutions. It’s almost always like that."
Uncertainty stabilizes
No-one on the market is talking about the start of a recovery. What happened this week, according to Goren, is that the level of uncertainty on the part of investors stabilized somewhat, "even if its ‘bad uncertainty’, and in that kind of situation, the market can move forward.
"Investors have by now understood that the economy is on the way to a recession - it has come to a halt. We also realized that there was a problem with the functioning of government ministries, and that a downgrade of Israel’s credit rating could be expected," says Goren. "Then we took on board that the government would throw money at the home front, and it seems that the economy is getting back to routine under war conditions that could continue for two years."
Goren recommends that investors should try to neutralize emotions. "In my opinion, if shares in the banks are being traded at a multiple of 0.75 on equity, that’s attractive pricing for them, even assuming a long war, an economic recession, and the collapse of businesses in Israel."
Another senior capital market source says, "The rises on the stock market this week came too soon and are not in line with the seriousness of the situation. In my opinion, it’s too early to increase investment in the Tel Aviv stock market. Because of the rises in the past few days, an opportunity has arisen to make ‘retrospective improvements’, that is, to adapt the level of risk in the portfolio to the war situation."
He says that the campaign that has begun in the Gaza Strip looks as though it will be a prolonged one. "When does the capital market rise? When it sees that the war is about to end. I don’t yet believe that that is the situation, and so the investment portfolio needs to be balanced. In fact, people should focus on managing risk, and should not be striving for returns. In the spirit of the times, I think we should avoid ‘large maneuvers’ in our investment portfolios, and adjust them gradually."
IBI Investment House chief economist Rafi Gozlan believes that the short uptick in the stock market is a normal correction. "It’s part of the regular behavior of the stock market, which doesn’t go at full power in one direction. We had a sequence of days of declines, and in my view the market has more or less digested the situation that has been created and made an assessment. It could also be connected to the relative stability that has been achieved in the foreign exchange market, but of course things are very fluid. I believe that the market has priced in the situation that has come about. If the security situation worsens, that will clearly change."
The bond market: Recovery, or time out?
It’s not just the stock market that has undergone upheavals. Yields on Israel government bonds have been high since the war started, indicating a rise in risk in the local economy. Market sources point out the expected economic consequences of the war, which have also led to a downgrade in Israel’s credit rating outlook by S&P, alongside negative signals from Moody’s and Fitch as well. "The yield to redemption on 10-year and longer shekel-denominated government bonds continued to rise, and reached 5.3% at the end of October, which compares with 4.4% at the end of the previous month and 3.7% at the beginning of the year, a rise that reflects a rise in economic risk," the Tel Aviv Stock Exchange review states.
"We received a clarification from the Bank of Israel in the last interest rate decision," says Gozlan, "that as long as there is upward pressure on the risk premium, we will not see the interest rate fall. For investors, yields of 5.4-5.5% at the long end of the curve start to look attractive."
At the same time, last month too the trend of the public switching its investments to overseas markets and to money-market funds, at the expense of the local stock and bond markets, continued. According to the Tel Aviv Stock Exchange, the public continued to withdraw money from funds investing in securities in Tel Aviv, chiefly bonds, and poured money into mutual funds investing overseas and interest bearing money-market funds (which are similar to bank deposits). NIS 3.2 billion were redeemed from bond funds in Tel Aviv in October, following redemptions totaling NIS 21 billion from the beginning of the year to the end of September. NIS 5.9 billion flowed into money-market funds last month, following an influx of NIS 42 billion between January and September.
What to do with the investment portfolio?
The senior market source with whom we spoke says, "You can’t look at the stock market in Israel as all of a piece. Supermarket chains presumably benefit to some extent in a period like this because people stock up on food and basic products, and don’t go out much. Insurance companies are worse hit, because the declines on the stock exchange affect their market investments, while the risk premium in the policies they sell rises. The inclination to invest overseas is still justified. We are seeing the US economy functioning well, and the third quarter company reporting season was, on the whole, positive."
How would you construct a portfolio of up to 30% equities?
"I would buy 15% overseas stocks, 12% Israeli stocks, and keep 3% in cash or deposits. For the 70% fixed-income, I’d have a layer of government bonds to reduce the risk, and also for the sake of liquidity. The fixed-income part would be made up of 40% government bonds, half of it index-linked and half shekel denominated. The balance would be held in dollar-denominated corporate bonds and US government bonds. These are relatively high proportions for a local investment portfolio."
The above does not represent investment advice or marketing that takes into account the circumstances and special needs of each individual.
Published by Globes, Israel business news - en.globes.co.il - on November 1, 2023.
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