Almost three months have passed since Minister of Justice Yariv Levin unveiled his far-reaching judicial overhaul plan, pushing the country into 12 weeks of upheaval, which was also reflected in Israel's economic performance. "Globes" investigates how the Tel Aviv Stock Exchange (TASE) fared during that time compared with overseas stock markets as well as the effects on the shekel and changing behavior of Israelis in terms of savings.
In particular, there were two trading days during this period that exemplify the close correlation between the progress of the judicial overhaul legislation and market performance. On days when it seemed that compromise on the judicial reforms was nearing, the leading indices on the Tel Aviv Stock Exchange (TASE) showed gains, and the shekel strengthened against the dollar.
For example, last Thursday, when it became known at the end of the trading day that Minister of Defense Yoav Gallant was expected to call for a halt in the legislation, and Prime Minister Binyamin Netanyahu said he was making a "dramatic announcement," the TASE rose sharply and the shekel strengthened. Later, when the Prime Minister announced that there was no such pause - the forex trend reversed.
Yesterday too, when it became clear that the government was set to pause the judicial overhaul, after massive demonstrations through Sunday night after the firing of Gallant, the TASE climbed sharply and the shekel appreciated to its strongest in six weeks.
Politics and the protests have played a role in the slowdown
Mizrahi Tefahot Bank chief economist Ronen Menachem believes that as long as the tensions surrounding the judicial overhaul continue, so will the potential negative impact on sentiment on the TASE and foreign exchange markets. The sharp daily increase in the value of the shekel and on the TASE was attributed to reports that Netanyahu has decided to pause the legislation, which provided the market which temporarily soothed the market. He said, "In any event, the very high volatility in the shekel exchange rate will continue, at least in the near future and the correlation between the events in the political arena and the shekel exchange rate is sharpening."
Prico Risk Management and Investments CEO Yossi Fraiman believes that the protests were a big influence. "The high involvement of a wide public in the protest rallies, and the uncertainty that contributed to a more cautious approach in decision-making and a new balance, led to damage to economic activity and the GDP. The global crisis and the sharp increase in interest rates form the basis for a slowdown in economic activity in 2023. However, in Israel, the legal reform exacerbated the situation, and caused damage to economic activity among key growth engines and the high-tech sector."
Fraiman adds that generally speaking, the coming period on global markets is expected to be stormy. However, the consequences of the internal situation in Israel are also weigh heavy. "The global slowdown along with the continued rise in inflation are putting the policies of the central banks to the test. The fear of a domino effect that will damage the markets due to a credit crisis with the rise in financing expenses, contributes to the decision to act cautiously, while maintaining the high level of interest over time - a move that harms the recovery capacity and the robustness of the financial institutions that are exposed to extensive credit with an emphasis on the real estate market and the business sector. "The Israeli economy is exposed to the global crisis and has to deal with the local rollercoaster, and this is a challenging and risky situation."
The TASE and shekel have underperformed in 2023
Despite all this there have been no dramatic developments on the TASE since the start of 2023. The Tel Aviv 35 index is down 1% since the start of 2023 (as of Monday noon). At the same time, the NYSE S&P index rose by about 3.5%, so there is a difference but not dramatic.
IBI Investment House premium department head Gil Dotan says the explanation for this difference lies in the mix of indices. "Let's put aside for a moment the issue of the judicial overhaul or reform, and it seems that the differences arise beyond that from the mix of the local stock market compared to the S&P. In the S&P about 30% are technology stocks, a sector that has performed well since the beginning of the year. The Nasdaq index rose by 13%, and what pulled the S&P index up is technology. Excluding technology, the S&P index would have registered a return of zero during this period.
"Here in Israel we are Startup Nation but the TASE does not have many large tech companies on its leading indices, and that is one of the reasons that it did not rise like the S&P.
"Another thing regarding the mix is the finance companies component. Banks, for example, are a much larger component in Tel Aviv than on the S&P. The banks here since the beginning of the year have been very stable, rising a little more than 3% compared to the 10% decline in the banks in the US. At the same time, there are also the real estate companies, which are also a larger component here than there, and which have not 'behaved' well since the beginning this year."
Beyond the mix, Dotan points out that "In 2021-2022, the local stock exchange was one of the best in the world, both cumulatively and each year separately. In practice, it is true that from the beginning of 2023, the stock exchange in Israel is lagging behind other stock exchanges in the world, but in terms of results, the judicial reform issue has not had a substantial weight or a large impact from the beginning of the year. In practice, it is true that the stock market here is lagging behind others in the world, but the gaps are not large and they are explained by the mix and performance in 2021-2022, and not necessarily by the legislation.
"The public in substantial numbers 'voted with their feet' and made a decision to exit the capital market, among other things, due to the alternative that was created, of interest rates on deposits, and also opportunities in the local stock exchange in bonds where the yield is relatively very high, with high ratings, without dangers and risks that are too high. These are bonds of companies in sectors such as banks, insurance and communications, or high yielding real estate companies with a strong cash flow."
How do you explain that despite these redemptions, the impact on the market was not substantial?
"As mentioned, there were gaps, but not substantial ones. One of the explanations is that the market is mainly controlled by institutional bodies and not by the public (through the mutual funds), which is where the sharp changes and fluctuations are. Still the institutional bodies, the pension, provident and advanced study funds, also pour money into the local stock exchange. On top of that, unlike other stock exchanges in the world, the proportion of foreign investors here is low. This does not mean that there will never be resilience, but at this point, the declines are relatively moderate."
However, according to Dotan, "If the legislation continues, then there could certainly be a negative impact. At the current point in time, the impact on the capital market is not great. And this, when what we are seeing is very substantial and dramatic redemptions in the mutual funds."
The foreign exchange market was also influenced.
A substantial impact was also felt on the foreign exchange market. As we have come to see even more strongly in recent days, progress on the judicial reform legislation weighs on the shekel, while on the other hand, when there was an expectation of a compromise or a pause in the legislation, the shekel strengthened sharply. Overall, the shekel, which was has been one of the strongest currencies in the world in the last decade, has weakened by 1% since the start of 2023 and is underperforming compared to most of the leading currencies. This, even after the halt of the legislation led to a significant strengthening of the shekel against the dollar. If we were to look at the exchange rate last week, the picture was far gloomier.
Dotan says, "The shekel has weakened since the beginning of the year against the dollar and against other currencies." But he adds, "If they had said at the beginning of the year that the reforms would progress, and within three months everyone would be on the streets, and the dollar would only strengthen by about 2%, then this is not a drama."
The concern: Continued legislation would have a negative impact
Fraiman believes that pushing ahead with the legislative process unilaterally and without a broad consensus would see the shekel reaching new negative levels in terms of depreciation. Only last week, the shekel weakened to NIS 3.71/$ - a level not seen since January 2019. "Against the background of the dismissal of the Minister of Defense, the spontaneous demonstrations throughout the country, the dollar jumped back up to NIS 3.66/$. It is estimated that the continuation of the legislative process might have seen the shekel depreciate to NIS 3.72/$ and continue towards NIS 3.8/$ or above. On the other hand, stopping the legislative process calms the markets and he sees the shekel strengthening beyond NIS 3.55/$.
Fraiman adds that if the shekel-dollar exchange rate remain high now that it is the end of the month, this will contribute to an increase in fuel prices and this will roll on to the food and consumer goods markets. Price increases and higher inflation contribute to the assessment that next week the Bank of Israel might raise the interest rate by 0.5% and that the price increases will support further interest rate hikes.
Published by Globes, Israel business news - en.globes.co.il - on March 28, 2023.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.