"If we try to sum up everything that has happened in the market recently, the end of 2018 cannot be ignored, but the first thing that must be considered is the direction of the interest rate," Psagot Security chief investment officer Gat Megiddo said at the "Globes" Capital Market Conference in Tel Aviv today.
In a panel discussing the investment market, Megiddo said, "The strong sell-off in the market towards the end of 2018 was based on investors' concern about an interest rate hike, and we received a mirror image of this in the first third of 2019, on the assumption that the Fed's policy should be more dovish."
He added, "Today, also, when we look at the situation, we see uncertainty, with two main causes: a threat of a slowdown and uncertainty about the trade war, which increased in the past week with the decision by US President Donald Trump to impose customs tariffs on Mexico, a decision that is not economically justified."
According to Megiddo, "In today's situation, the investment portfolio should be balanced and include both shares and bonds. There are many opportunities in the stock market at any given moment, and we think that it is worthwhile concentrating on equity in Israel and the US. Investment institutions there have fantastic opportunities in value shares."
"The Bank of Israel will now find it difficult to raise the interest rate"
Commenting on the state of the markets, Leumi Capital Markets interest rate strategist David Reznik said, "When we look at the interest rate situation in the US and its development, we can see that in the fourth quarter of 2018, the market signaled to the Fed that it was going too fast, but the Fed persisted in its path up until the end of the year. The market didn't like this, and in 2019, we saw the Fed revert in stages to the way the market was going by terminating its interest rate hikes. In recent days, we have been seeing the exact opposite, with the Fed talking about cutting the interest rate and the question being not whether it will fall, but when."
From a broader perspective, Reznik said, "It is necessary to look at the investment world and think whether Nipponization is spreading throughout the world, because in the euro bloc, it already exists."
Talking about the local market, Reznik added, "The Bank of Israel may have made a mistake, because earlier, it could have raised the interest rate slightly, but it did not do so, and it will now find it difficult to raise it because of the Fed's policy."
"The markets are completely addicted to the liquidity of the central banks"
Financial manager Anat Levin commented on the state of the markets, saying, "The attempt to predict the future always fails. I feel like in the Game of Thrones: Jon Snow, the US S&P index, died in December, but they resurrected him afterwards, because the markets are addicted to cheap money. Nevertheless, I'm not sure that the story will end well for him."
Levin added, "The markets are completely addicted to the liquidity of the central banks, and the banks, which were accustomed to dealing with inflation, don't know what to do about inflation of assets, and that's what's happening now. Today, there are assets whose risk is not understood. There is a structural change here, and the central banks have to understand something completely different about the world's economies."
Levin believes that "In this world, we have to look more and more at something that currently seems remote, irrelevant, and strange, called ESG investments, which take into account the future effects on the environment, society, and the government. In such a world, people eventually lose money on a company like Teva, because it apparently did something or was a party to something unacceptable to society or the government. Of course, as of now, it is to be presumed innocent."
In order to demonstrate the dynamic state of the market, Levin said, "The public wants alternatives that have been unavailable to it up until now. The insurance and real estate markets have changed. These are major changes that must be considered. For example, the ocean in Florida is rising by one millimeter each year. In 5-10 years, it will be impossible to insure properties there, and certainly to buy 30-year bonds."
Referring to the cannabis trend, Levin said, "Like everything else, this is an amazing idea with an unclear business model. There are a great many companies, a few of which will succeed, but the majority will not. The public wants things and alternatives that have been unavailable to it up until now. The global insurance markets have changed, the real estate markets have changed. I wish success on all those who think that they will have a pension 30 years from now."
S&P Maalot CEO Ronit Harel Ben-Ze'ev said, "We see increasing amounts in both the US and Europe tracking ESG investments. In Israel, we are backward in this respect. This matter should play a larger role for us, and outside of Israel, regulation encourages this."
Concerning the bond market, in which most of Maalot's business in concentrated, Harel Ben-Ze'ev said, "There is no doubt that it has been very volatile in recent months. Given the great liquidity in Israel, demand is still outstripping the relatively limited supply of investments, and the US market therefore still constitutes an alternative. "When we look at the Israeli market, it is limited in both marketability and sector diversity, with 35% in the real estate, which is very sensitive to the interest rate, together with the finances that are also a large part of it. This market is also very sensitive to money withdrawals by the public. On the other hand, dispersal and diversity in the US market are very significant, and balance is therefore required between investments in bonds in Israel and overseas."
Keystone CEO Navot Bar said, "One of the good investment options is infrastructure projects with a relatively large and stable cash flow. The client is usually a state, there is almost no demand risk, and their behavioral profile is the most similar to bonds, except for their operating risk."
Bar added, "The return here is almost guaranteed, and can vary from 6.5% to 13%, depending on the stage at which the project is entered: the most fruitful and safest stage in which revenue is generated, or the earlier stages. This does not involve revolutionary technologies and startups, however, which are high-risk. The risk is relatively small, with a good risk-return ratio."
Bar also said, "Up until now, infrastructure was closed to individual players. Now, however, the regulators are allowing the founding of infrastructure funds that must be listed on a stock exchange in order to enjoy tax benefits. Given such a marketable tool, investment in infrastructure is accessible to everyone via the stock exchange, with the sole difference from the real estate sector being an absence of demand risks."
Bar concluded by saying, "Investment in infrastructure can also be affected by volatility, but not like real estate. Infrastructure is part of our existential needs - roads are becoming more crowded, and railways and mass transit require a solution. We also see tenders, there are gas discoveries requiring infrastructure, and new desalination facilities."
Full disclosure: the "Globes" Capital Market Conference was held under the sponsorship of and in cooperation with Bank Leumi, the Psagot investment house, and the Keystone fund.
Published by Globes, Israel business news - en.globes.co.il - on June 5, 2019
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