Eran Kimchi and Alon Hadad are probably the two most optimistic investment managers around as far as the local stock exchange is concerned, and not because Hadad is the life partner of Speaker of the Knesset Amir Ohana, but because, they argue, prices here are low by global comparison. Kimchi and Hadad have worked together for fifteen years. Kimchi was formerly the manager of the Israeli stocks desk for the nostro of Migdal Insurance, while Hadad worked in UK interest rate futures trading at Matrix ABC Trading and Investments, and later in the risk management department of Discount Bank.
Today, they jointly manage Mimes Strategies Hedge Fund, which they founded in 2017. The fund operate mainly in Israel, in both short-term trading and long term investments, with combined strategies of long and short positions on stocks and to a lesser extent bonds, "because that has been our expertise for years; we’re familiar with the local market," they say.
Their optimism about the Tel Aviv Stock Exchange is based on the fact that wars are usually followed by an economic boom. Kimchi: "The local market is depressed, and there has been no appetite for buying since early 2023, because of the judicial overhaul and the protests. That brought the market to a halt just when markets around the world were rising. Then came October 7, and Israel sustained another serious blow. The world continued to rise, while in Israel everything stopped, probably rightly. People are now frightened of buying shares, as the war has its effect, and there is also the cloud over what will happen in the north and with Lebanon. Over eighteen months, a large gap has opened up between Israel and the rest of the world."
But where people see fear, these two say they see an opportunity: "Stocks here are cheap across the board, even large, liquid stocks are priced low, and, looking at the long term, we think that there’s an entry point here for value stocks. There are many sectors and stocks where buying now offers a very high, long-term return, and that is even before we talk about normalization with Saudi Arabia. It’s enough that the end of the war should be in sight, and I think that there could be a crazy boom here, as happens after wars. It’s like a spring waiting for everything to become clear. When it happens, there’ll be very large upside, and that’s regardless of the identity of the government, whether it stays or is replaced."
"Israel is a country with a high birthrate, growing, in high tech, so that from every point of view apart from the war it is well positioned," adds Hadad. "So when it ends, the very wide gap with the rest of the world will close, and perhaps even more than that."
Financial institutions such as Altshuler Shaham talk of Israel becoming a smaller and smaller proportion of their portfolios. Do you share that projection?
Kimchi: "After the war, probably in 2025, a reverse process will take place, optimism will return, and the institutions will realize that it’s worthwhile investing here. From an economic point of view, investing in Tel Aviv pays more than elsewhere. In the US, the risk premium in stocks versus government bonds is at a very low level historically (a gap of 0.5% versus over 3% a year ago, N.A.), and so it simply doesn’t pay to take a risk on US stocks. That’s a bad indicator for the stock market there."
A different portfolio
Following on from this perception, the investment portfolio that Kimchi and Hadad recommend looks very different from those of the financial institutions. While the latter talk of investment in the equities component being mainly overseas, Kimchi and Hadad recommend a significant over-allocation to Israel: 60/40 in Israel’s favor. Thus, when we ask them to build an investment portfolio, they recommend a conservative investor to allocate 12% of the portfolio to stocks in Israel and 8% to stocks overseas.
On the fixed-income side, the yield on long-term Israel government bonds reached 5% last week, the highest since 2011. Mimes, however, is not alarmed, and allocates 30% of the portfolio to Israeli bonds with maturities of over five years, and another 20% to short-term government bonds. The rest of the portfolio is made up of 15% corporate bonds in Israel and 15% overseas.
For an aggressive investor, they recommend allocating 40% of the portfolio to Israeli stocks, 20% to stocks overseas, 10% to long-term Israel government bonds, 8% to short-term government bonds, 12% to corporate bonds in Israel, and 10% to corporate bonds overseas.
As for the division between shekel bonds and index-linked bonds, Hadad recommends thinking long term, and so allocates 70% to shekel bonds and 30% to index-linked. "Inflation should come down. It’s true that it’s resurgent now because of the war, and tax hikes are expected that will translate into higher prices, but these are temporary things connected to the war," he says. "In the longer term, inflation will subside to lower levels. That’s true of the rest of the world as well, where technology has caused prices to fall, and now the Ai revolution can be expected to bring prices down, so that the world will return to lower inflation."
In favor of infrastructure and finance
Asked which sectors they would recommend, Kimchi and Hadad again focus on Israel. "There are three main sectors, and one more to keep an eye on. The first is infrastructure, since we are a growing country. There was momentum in infrastructure before the current mess, and after the war it will continue even more powerfully. There is no doubt that large investment is required in infrastructure here, a need that will only increase."
The second sector is banking. "The banks are at low equity multiples of 0.8%, and are achieving high returns on equity. Their p/e ratios are at historical lows. Today, without big surprises, it’s possible to lock in a very high return going forward. Since we’re talking about stocks, it’s not of course a real locked-in return, but you’re a shareholder in a bank with a return looking ahead of 15-17% priced in. Today, you can’t not hold banks in Israel."
"The third sector is insurance, which is also priced very low." In this case, the pair believes that there is a double reason. "This is a sector that is a little complicated to understand, but all the companies are showing nice improvement in underwriting profits. Besides that, there is a new accounting standard due to come into force at the beginning of 2025, and the result will be that their shareholders’ equity will be higher, and so the insurance companies will look much more attractive, and that is in addition to the fact that they benefit from the rise in world markets."
A sector that Hadad and Kimchi advise examining favorably is income producing real estate. "Many people today say not to invest in that area, but the market is pricing in too great a blow from the rise in interest rates and in capitalization rates," Kimchi says. "In our view, the shares will not be hit as badly as the market reflects"
Published by Globes, Israel business news - en.globes.co.il - on June 4, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.