How to invest as the shekel strengthens

Investment Photo: Shutterstock

Israeli experts discuss the best stocks and currencies to invest in as the shekel appreciation gains ground.

As the shekel continues to strengthen, "Globes" asked senior executives and investment experts at Israeli financial institutions where it is advisable to invest in the wake of the new exchange rate levels and who is going to be most hurt by the shekel appreciation.

Bank Hapoalim head of advising and research Rivka Elgarisi recommends investing in the US, combining tech stocks and value stocks. She said, "Value stocks can be shares of companies in the infrastructures sector, which is very hot and will perhaps bring high returns like tech stocks, although there is smaller volatility. Finance and real estate stocks will also continue to lead as well as private consumption stocks in fields like local marketing chains, and profitable domestic tourism and restaurants. Healthcare will also continue to enjoy growth while the world is suffering from Covid.

She added, "In Israel, the finance sector will continue to demonstrate profitability and high revenue because growth reflects low risk in credit and we see how the mortgage sector is flourishing due to high demand for housing. In the communications sector there are specific companies that we recommend and generally we prefer the stocks of large companies and focus less on smaller companies because at a time when raw materials are becoming more expensive and inflation is rising, larger companies fare better than smaller companies."

Elgarisi stressed that over the years Bank Hapoalim has recommended that investors do not take a deliberate foreign currency exposure. "We do not advise taking a position on the dollar or the euro. Only in situations where the client has dollar or euro linked commitments and wants to invest the money will we do 'back-to-back' so that the client won't be exposed if the same currency strengthens and commitments rise, while the investments have not risen."

In general she doesn't not see any reason to invest in either the dollar or the euro. "The euro has had negative interest rates for some years and the US dollar has been around zero, very similar to the shekel."

Don't take a gamble on foreign currency

Mor Portfolio Management CEO Lior Grinhouse declines to make macroeconomic investment recommendations and focuses more on where not to invest at the moment. He supports Elgarisi's advice. "Whoever has no specific need in foreign currency in order to hedge their activities should not invest in foreign currency. Only if you are a foreign currency company or you want to grow as a country or company for geopolitical reasons should you invest in foreign currency. If you have business activities abroad then it is most logical to work in the currency of the country that you are operating in and not to take a currency risk.

"He added, "When I talk to companies, I advise them not to gamble in foreign currency. The significance of foreign currency gambling is to take a shekel debt when the companies is operating abroad in dollars or euros. In my opinion, this is to open a foreign currency position against the shekel and that's not smart. If you have operations abroad, try to finance it abroad. If you have obligations abroad, strengthen your foreign currency balance but don't try to orchestrate the holdings or gamble against the shekel because that won't be healthy.

"That doesn't mean that you shouldn't invest abroad. You should invest abroad and a lot but by creating the right foreign currency exposure for you and if you are in Israel then it's worthwhile that most of your investments are not influenced by foreign currency. It's possible to enjoy the benefit of investments abroad with more moderate exp0osure to foreign currency but you don't need to invest only or mainly in Israel because of this."

Clal Insurance and Finances head of global markets strategy Amir Argaman said, "If we look at the composition of companies (in Israel) there are many local players who are more insulated from these volatilities. But when you look at companies in traditional industries like Teva, ICL and the like that rely on exports with no small expenditure in shekels, they are detrimentally influenced by the change in the exchange rate.

"If 90% of the company's expenditure is in dollars then the weakness of the dollar won't influence them but there are many tech companies that can be hurt, depending on their activities. But if you want to make a generalization, the influence is very secondary, given the strength of activities that we are seeing in high-tech.

"In terms of benefitting, there are importers and companies based on buying foreign currency products from abroad, which have become cheaper. In other words importing consumer products is being done at more attractive prices. So companies with a major import element will profit. But again it must be stressed that if in the US when analyzing the index industries can be more easily characterized as export or import, in Israel it is more of a micro story - you must take a company and see the mix of revenue and expenditure and from here gain insights about investing in it.

Import companies in consumer-based industry benefit from the shekel's strength

Israel Discount Bank equity research specialist Erez Kopatch said, "Israeli importers have recently been hit as a result of the increase inprices of imports (due to the rise in prices of raw materials and shipping) but the strengthening of the shekel against import currencies as been a factor offsetting this for them (purchasing power in shekels has strengthened). When you try to think of a net importer, who can benefit from the strengthening of the shekel, there are companies that can be thought of in the basic consumer industry in Israel. The basic consumer index includes many importers of food, clothing, cleaning materials and mainly their sales in Israel as well as vehicle importers and leasing service providers who purchase vehicles in foreign currency and sell and lease them in shekels.

"Generally speaking we can say that since the outbreak of Covid, the domestic economy has still been experiencing strong demand and so we can still expect revenue to continue being strong. Another factor supporting the industry is that the rise in commodity prices worldwide might be an 'excuse' for some local companies to reduce offers and even raise prices for the consumer and thus improve profit margins."

Psagot mutual funds manager Danor Erez also stressed that it is a given that the shekel appreciation will benefit importers and be detrimental for exporters. "If we break this down to sectors we will see inter-connecting influences. For large importers of clothing and consumer goods the impact will be very positive (of course they buy in dollars and sell in shekels) and in addition there is the influence of the small amount of foreign travel due to Covid, which increases their business activities and this stood out in the financial reports of Delta Brands published two days ago. The rise in shipping prices has slightly offset the trend, but for the most part the direction is positive." Erez picks out Fox, Castro, Electra Consumer products, Neto and Diplomat as among the companies worth investing in.

"On the other hand, the weak dollar detrimentally effects large exporters and companies operating mainly abroad, which is broad sectoral terms means high-tech, innovative industries, defense industries and more. These companies sell in dollars but part of the expenses are in shekels and this is going to hurt them. For example, Elbit Systems - its business direction is very positive but the currency influence will compromise their profitability. In addition the gas companies who have contracts in dollars will be hurt by the weak dollar." He also mentions real estate companies operating abroad who will be adversely affected by the strong shekel.

The main losers: Exporters

Harel Insurance & Finance head of economics and research department Ofer Klein warns that many exporters with low profit margins may struggle to survive with an even stronger shekel. "Structural factors continue to support the shekel: the growth in exports of services continues to widen the current account surplus (which reached a record in the second quarter) and also Israeli IPOs abroad, the acquisition of Israeli companies by foreigners, and in recent weeks the rise in the stock markets (with an emphasis on the US tech indices) as well as an expected faster rise in short-term interest rates."

Published by Globes, Israel business news - en.globes.co.il - on November 4, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

Investment Photo: Shutterstock
Investment Photo: Shutterstock
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