The Bank of Israel, which today warned against the effect of the downtrend in the Israeli financial assets market, itself has suffered heavy losses due to this trend. The Bank of Israel is liable to report a $2 billion loss on its foreign currency portfolio in 2018 as a result of the steep falls in the share and corporate bond markets (the loss in recent months is much greater). The Bank of Israel can perhaps take comfort in the fact that it reduced its exposure to shares slightly during the year, after having increased it to 13.3% of the portfolio, but its losses on shares will detract from the portfolio's performance, which has yielded positive returns in recent years.
The Bank of Israel's foreign currency reserves totaled $115 billion as of the end of November. All of it is invested overseas in the capital markets of the US, Japan, Germany, France, South Korea, and Hong Kong. Under the investment rules set by the Bank of Israel Monetary Committee, the market department, which is responsible for managing the reserves, can hold up to 25% of the portfolio in shares and corporate bonds. The Bank of Israel actually holds 18-19% of the portfolio, $20 billion or more, in shares and corporate bonds.
As of the end of 2017, the most recent official update, the Bank of Israel held 13.3% of its portfolio in shares and 6.6% in corporate bonds. A check by "Globes" shows that the proportion of shares was reduced to 12% this year, while the proportion of corporate bonds remained unchanged.
Both of these instruments have fallen sharply this year. On the US stock market, which accounts for 60% of the total portfolio in shares held by the Bank of Israel, the S&P 500 Index has fallen 10% since the beginning of the year, while Nasdaq has plummeted 14%. The LQD investment grade corporate bond index has also dropped over 4% this year. The downtrend also extends to the leading share indices in Japan and Europe, which have suffered losses of over 10%.
The Bank of Israel can also take comfort in the fact that the US government bonds, in which the largest proportion of its portfolio is invested, has recovered since November, following investors' flight to safe assets. This recovery almost completely eliminated the falls in US Treasury bonds in the first three quarters of the year following the interest rate hikes by the US Federal Reserve Board. Another factor offsetting the losses on shares and bonds is the shekel depreciation against the dollar, after several years of appreciation.
The Bank of Israel explained that it decided to increase its investment in shares because the bulk of Israel's foreign currency reserves are long-term investments, and shares generate higher returns in the long term, even if they are exposed to relatively sharp downturns in some years. As of the end of 2017, the cumulative return on the foreign currency reserves in the preceding five years (2012-2017) was 9.2% including shares and corporate bonds and 3.6% excluding them.
Published by Globes, Israel business news - en.globes.co.il - on December 23, 2018
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