"Cheapest stock market in the Western world"

Ori Keren, chief investment officer at More Provident Funds  credit: PR
Ori Keren, chief investment officer at More Provident Funds credit: PR

More Provident Funds chief investment officer Ori Keren says the investment house has rebalanced its portfolio towards Israel.

No end to the war in the Gaza Strip is yet in sight, but this is an event that will eventually pass, and its intensity is expected to decline in the first quarter of 2024. Meanwhile, the Israeli stock market has become the cheapest in the Western world, creating investment opportunities. These are the views of Ori Keren, chief investment officer at More Provident Funds, given in a webinar for investors held recently by Karni Family Office.

"Israel is a country used to security events, but none of them was as severe in the sense of the harm to the civilian population as the current one," Keren said in his opening remarks. "But whether it continues as a single front in the south or whether the northern sector joins in, we are talking about a security event that will finish within a month at best, although the more likely scenario is that its intensity will start to decline within three to four months."

Until the outbreak of war, "we experienced a year with returns that were ‘OK’ on the capital market, because they were mainly affected by overseas markets, which had an excellent year," Keren said. "The Israeli market underperformed because of political uncertainty, with the attempts to promote the reform in the legal system and the split in the nation between its supporters and opponents. This uncertainty led to a reduction of investment by both foreigners and locals in the local market. The desire to invest money overseas grew, and that caused stocks to underperform in comparison with Wall Street."

The main index on the Tel Aviv Stock Exchange, the Tel Aviv 35, is still 6.5% below where it was before the outbreak of the Iron Swords war, but it has so far recovered about half of what it lost when the war started. At the end of July, More Provident Funds and Pension had over NIS 67 billion under management. In October, which was an especially difficulty month for provident and pension funds because of the declines in both local and overseas markets, it was among the leaders of the returns table, among other things because of a policy of a massive return to investment in local stocks. More Investment House’s advanced training funds posted a negative return of only 2.2% last month, placing it third after Altshuler Shaham and Yelin Lapidot.

"Post October 7, it looks as though the story of the judicial overhaul legislation and everything surrounding it is over, and will not be with us in the near or medium term," Keren said. "We believe that, when the fighting dies down, the pain will remain, but the focus will go back to being on how to restore the economy to growth, when military expenditure will probably have to rise."

What changes have you made in your investment portfolio?

"From the beginning of the year, we reduced the weight of Israel in the share portfolio. Two years ago, 35% of the share portfolio was invested in Israel and 65% overseas. From the beginning of the year until the war broke out, the weighting of the local market fell to just 20%, because of the conduct of economic policy here, fears of a slowdown, and so on. In October, the falls on the market here were very significant and created many opportunities. Our assumption was that it was a painful event that would end, and, looking a year ahead, we assume that the Israeli market will outperform the global stock market. In October, we became the Western country with the cheapest stock market in the world."

How did you act, in the light of this understanding?

"We took advantage of the opportunities. We bought to the tune of tens of millions of shekels daily, sometimes hundreds of millions. We returned our portfolio to 30% Israeli stocks, 70% overseas. That’s a very significant change that we made. I think that this move will prove to have been very correct in the long term, after yielding returns even in the short term."

What about inflation in Israel?

"In my view, the rate of inflation will fall faster than people expect. The big threat was the shekel-dollar exchange rate, which rose to NIS 4.08 at the beginning of the war, but then halted, and fell back to below pre-war levels. So one factor generating inflation has calmed down a lot. The war will lead to an economic slowdown, which will also restrain inflation. In my opinion, in the first quarter of 2024, perhaps as early as January, we shall start to see interest rate cuts. The Bank of Israel will ultimately have to join efforts to accelerate growth, and as part of that to cut its interest rate."

What’s your forecast for the Israeli real estate market?

"At the moment, it’s completely frozen. There are hardly any sales of new homes, because financing costs have risen so much. Also, workers are not coming in from Judea and Samaria and from Gaza, and some of the foreign workers have left. You have to distinguish between the short term, in which the market is frozen, and the slightly longer term, in which we get back to Israel’s chronic problem - a shortage of housing units.

"There is suppressed demand, and many people are waiting on the fence. To that should be added the issue of anti-Semitism overseas, and we hear from developers that there is initial interest from French and British Jews. It will be sufficient for a few tens of thousands to come to get the market flying. A year from today, assuming that interest rates fall, we’ll see a livelier real estate market from the point of view of transaction numbers and activity at sales offices. From there, it could easily go back to being a market of rising prices."

"Banks, insurance, and real estate developers are interestingly priced"

What opportunities do you identify on the stock market?

"Despite the degree of recovery in Tel Aviv, the Israeli market is still cheap, even very cheap, in comparison with other markets around the world."

Keren adds that the trend of Israelis transferring large proportions of their portfolios to investment in the S&P 500 Index could turn out to be risky, and that this should be done judiciously. "This index is not an insurance policy. In 2022, it was almost the worst among the world’s leading indices. This year, it corrected upwards and it’s behaving well," Keren says, but cautions, "It’s also an index that isn’t cheap at the moment, and is at multiples higher than the multi-year average."

Which sectors do you find interesting in Tel Aviv?

"The banks are among the cheapest in the world. The insurance companies are also interestingly priced, and real estate developers are not especially expensive. The bond market, however, was a window of opportunity that shut, and it’s less attractive now, because it is not pricing in the risks correctly. No-one know how big Israel’s fiscal deficit will get, but it will undoubtedly be significant. To the extent that the government does not maintain fiscal discipline, we will reach a situation in which Israel’s financing costs will rise.

"The state will have to raise a great deal of debt, and it won’t be easy for the market to accept that. If the conduct of economic policy is not good, that could cause a crisis of confidence on the part of foreign investors, which in the nature of things will lead to higher yields."

Published by Globes, Israel business news - en.globes.co.il - on November 21, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Ori Keren, chief investment officer at More Provident Funds  credit: PR
Ori Keren, chief investment officer at More Provident Funds credit: PR
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