This week's opening of trading on the Tel Aviv Stock Exchange was one of the most dramatic seen in recent years. In two days, the main indices fell by nearly 7%, making it a 9% drop over eight sessions from the peak reached at the beginning of the month.
The negative trend applied across all sectors, and was part of a global shift, led by stock markets in the US, that has been sparked by investors' fears that favorable conditions for equities are coming to an end. Looking ahead, it seems that uncertainty will continue to prevail on markets in the near future, which is liable to mean a continuation of the negative trend.
The Nasdaq fell by 5% at the opening on Monday, although the trend changed towards the end of the session, which ended on a rise of 0.5%. Similarly, after two days of sharp falls, the Tel Aviv Stock Exchange also changed direction yesterday, but it does not look as though that is necessarily a permanent reversal.
Investors' fears mainly stem from expected interest rate hikes by central banks, headed by the US Federal Reserve, against a background of rising inflation, and as part of the Fed's change of policy and tapering of support for the financial markets.
Even if economists and analysts do not believe that we are seeing a transition from a bull to a bear market, they expect continuing volatility and uncertainty, at least in the near term. "The market is very nervous at the moment; it has no direction and is trying to find support points," says Leumi Capital Markets interest rate strategist Dudi Reznik. "I'd say that the high volatility is likely to continue, especially leading up to the Fed's next interest rate decision due today. The Fed's announcement could help us understand where things are going and how aggressive it will be as the year goes on.
"There has been a very significant sell-off that started in the US at the start of the year and then trickled through to Israel. The background is fears aroused by the high rate of inflation in the US, which reached 7% at the end of the last year, and is likely to rise a little more in the early part of this year. That, together with high commodity prices, a geopolitical crisis in Ukraine, and further spread of the Omicron coronavirus variant, is weighing very heavily on the market."
Are we seeing a temporary correction or a long-term trend?
"It has been an aggressive sell-off, but still a sell-off. I don’t think we are entering a bear market. There's a drama going on, but as far as the sell-off is concerned, I estimate that most of the declines are behind us."
Reznik does add, however, that "if the Fed's interest rate announcement is more hawkish than expected, or if the situation in Ukraine develops into a war and sends oil prices soaring, that could reignite the bonfire."
IBI Investment House chief economist Rafi Gozlan is less optimistic. "The situation is more complicated than just a correction of the rises that took place, " he says. "The starting point is very high pricing on the markets, after a very strong rally, and we are in a nervous and volatile period. We probably haven't yet seen the bottom.
"You have to understand that the trend is far less positive than what we have seen over the past year, and the trend won’t change until we see a calmer inflation environment in the US. The focus has to be on the data, and the expectations on the market regarding a decline in inflation."
The Fed's target is inflation"
"The US is leading the markets, and because there's such high inflation there, until we see signs of a lull, the markets will be under pressure, because there's going to be a rapid mopping up of liquidity," Gozlan explains. "In the past few years, every time the markets sneezed, the Fed retreated, but now the story is different.
"The central banks are what pulled the markets upwards in the past year or two. Now, the Fed has inflation in its sights, and if it raises interest rates and doesn't affect commodity prices and inflation but hits the stock market, it isn't bothered about that."
How does the market in Israel look in relation to what is happening in the US and globally? Should people make changes in their investment portfolios?
"Here, the story is simpler. The better the job that the Fed does on the inflation front, the more of the work it does for the Bank of Israel. You have to remember that in any case inflation is not too high here, and most of it is imported, with product and commodity prices that have risen."
On the local market, Gozlan adds, "The economy here is dependent on technology, but the stock market is less so - and it's technology that is leading the downturn. In the end, when it rains abroad, the storm reaches us as well, and clearly the trend itself is global. Generally, however, when there's a downturn on world markets, our market does relatively well and is hit less severely.
"We're sustaining ricochets, and looking ahead at the next few months we're still heading in a negative direction until inflation subsides. It's therefore necessary to go for more defensive investments, whether in bonds or equities. Looking further ahead, the coming months will create good opportunities, because the market direction doesn't mean that the economy is going somewhere bad."
"It's true that the market here has taken a big hit in the past couple of says," says Reznik, "but before that it was one of the best markets in the world. The Israeli market continues to be better than the US market, because inflation here is lower and the Bank of Israel will not change its interest rate at least for the next six months. All in all, the Israeli economy is working well and getting through the coronavirus pandemic in good shape. The situation in Israel therefore looks good, and the Bank of Israel too is pretty optimistic about the economy in its forecasts.
"What happened in the past couple of days is mainly pressure from the public, but if things calm down globally, the market will calm down here as well. You have to remember that the main fears are over technology stocks, which rose steeply after the start of the pandemic, but the market in Israel is much less technology biased.
"When the ship is rocking, you have to wait. In general, for the longer term too there's no real reason to make big changes in the investment portfolio, and I also don't see too many alternatives. The bond market is not attractive enough to switch to it."
Published by Globes, Israel business news - en.globes.co.il - on January 26, 2022.
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