The Tel Aviv Stock Exchange (TASE) fell behind in 2023 in terms of returns. The Tel Aviv 125 Index rose by 3.3% compared with a 25% rise on the S&P 500 and a 43% rise on Nasdaq. So while in the US and Europe, the indices corrected the declines of 2022 and have risen to new records, in Israel the major indices are still 12%-14% off record highs.
Most Israeli investment houses forecast that in 2024, TASE indices will record double digit rises. Clal Insurance deputy CEO and head of investment division Barak Benski, who manages NIS 330 billion in investment funds, is among those believing in the investment potential for significant rises on the TASE.
Despite the impressive gains on the TASE in recent months - 16% up from the low-point at the end of October - wiping out the losses at the beginning of the war - Benski believes that the TASE is still cheap. "The pricing of the Israeli market is significantly lower compared with its own historical pricing, and also compared with other markets. There is a great potential here for an excess yield following the lowering of the interest rate, assuming that there will be no further deterioration in the security sector, and a certain relaxation in the political environment."
To Benski's credit, he backs up his assessments with actions, and in his case, with major investments. In the second half of 2023, Clal Insurance purchased of shares of leading companies traded on the TASE to the tune of over NIS 2.2 billion including in real estate development companies Acro Group (TASE: ACRO), Israel Canada (TASE: ISCN), Africa Residences (TASE: AFRE), Shikun & Binui (TASE: SKBN) and Aura Investments (TASE" AURA); income producing real estate company AMOT (TASE" AMOT); El Al Israel Airlines (TASE: ELAL); Meshek Energy (TASE: MSKE), which controls the Dalia power plant; and Bank Hapoalim (TASE: POLI).
Benski tells "Globes" about the sectors that will stand out, in his opinion, in 2024. He is positive about the bank shares, since "The streamlining carried out in recent years in the system will compensate for the expected increase in secured debts. The pricing of the bank shares today, around 0.8 on the capital, is attractive both relatively and absolutely."
On telecom stocks, he says, "These are operationally stable companies, with favorable pricing that contains the risks of the virtual SIM". He sees, "A considerable likelihood of dividend distributions in the cellular companies, for the first time in years". On the other hand, in the field of income producing real estate, Benski believes the commercial market "Will encounter a weaker consumer, and the office market will encounter higher unemployment and a fall in demand."
In residential real estate, he believes, "The expected fall in interest rates will benefit demand. There is a pent-up demand that is waiting to break out and together with the fall in building starts, these will affect the market in about 18 months. The construction trend in urban renewal will increase and be the preferred solution for the severe lack of land in areas of demand. The major companies in the field are excellently positioned to take advantage of the situation to increase the backlog of projects and profitability."
Benski qualifies his recommendations, "In addition to global uncertainty, Israel is suffering from the war against Hamas and Hezbollah, which follows a year of political complexity. If the fighting ends by the end of the first quarter of 2024, in our estimation its economic impact will be significant, but limited. If a northern front opens significantly and the the fighting continues until the end of 2024, Israel could suffer from a significant recession and negative effects on the foreign exchange rate."
The returns on Clal Insurance's provident and advanced training funds were relatively weak in 2023, similar to the other insurance companies, and it was placed last in the ranking. Market sources explain that the gap was due to the disadvantage of the size of the insurance companies and their higher exposure to alternative investments, which reduce volatility in the investment portfolio, but pay a price for this in returns in years when the stock market soars. However, when measured over longer periods, the gap between the returns of the different investment managers narrows. Clal itself was in first place in 2022 and in 2021 its ranking was relatively good, so that over time frames of three to five years it is ranked in mid-table.
The US market is preferable and only seems expensive"
What are your forecasts for overseas markets?
"Along with the 'soft landing' scenario in the global economy, we do not rule out a deterioration in macro conditions due to the delayed effect of interest rate hikes worldwide. The pressure from high interest rates on the global economy will continue, and with it the danger of a recession. The markets are pricing in significant interest rate cuts in the coming year, along with optimism about economic growth and companies' profits, but at the current point the chance of disappointment in the markets is not low."
Benski adds that most of stocks, even in the US, are at "reasonable prices," despite the fact that "most stock markets are fully priced and are not cheap compared to the yield inherent in the bond market." His explanation is that "Looking at the average data on indices can bring the wrong conclusion. The bulk of the return in the US indices was due to a limited number of tech giants, which the market believes will benefit from AI technology, while the rest of the stocks achieved a significantly lower return."
In the distribution of investments overseas, Benski believes that the US market is preferable to Europe: "On the surface, the (US) market looks expensive, but if you take into account the growth and the composition of the sectors in the indices relative to Europe, the pricing is quite fair." He adds that investing in the US rather than Europe is further strengthened by the fact that "the largest companies in the world are traded on the US market, which allows exposure to different geographies, even without investing in them directly".
He recommends the tech companies abroad, which is not cheap, but "The sector reveals defensive fundamentals due to the strength of the companies' balance sheets, the amount of cash, the strong pricing power and strong growth and the spread of exposure to different segments (chips, communications, software, cloud computing and of course AI)." In addition, the health sector which, "Is one of the defensive sectors due to relatively inflexible demand, convenient pricing and strong balance sheets, with a stress on the biotech and the medical equipment sector".
"To increase the bonds weight, the returns are interesting"
On the bonds market, Benski recalls that until two years ago the returns that could be achieved on this market were zero, while today it is all about returns of 5%-6% in solid assets. But these are on a downward trend, since the interest rates of the central banks are expected to fall and investors are currently buying bonds, and this raises their price and lowers the yields. He says, "Until two weeks ago, my answer was unequivocal that the bond yields are interesting compared with investing in stocks in foreign markets, and that bond expiry dates should be extended and the weight of the bonds in the portfolios should be increased."
However, in November, yields fell "very sharply, and in fact a large part of our forecast regarding the bond market has already come true. That's why today I'm more cautious, looking at a year ahead we can assume similar returns and maybe slightly lower, but on the way there considerable volatility is expected, which will also open up investment opportunities. In general, the bond yields are certainly interesting, and their weight in a diversified investment portfolio should be increased compared with recent years, when even without additional capital gains, the current yield is certainly appropriate," Benski says.
And what about the shekel-dollar exchange rate? In Benski's view, this is a question that cannot be answered, and it is currently considered an absolute gamble. "The direction will be determined according to the war and the political situation, and regarding both it is very difficult to be certain." Over the last year, the shekel managed to weaken by almost 15%, to about NIS 4.1/$, and within a month rebounded back to NIS 3.6/$, almost to its value at the beginning of 2023.
Published by Globes, Israel business news - en.globes.co.il - on January 1, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.