Mizrahi sees higher housing prices, stronger shekel

Modi Shafrir  / Photo: Rafi Delouya, ira prohorov
Modi Shafrir / Photo: Rafi Delouya, ira prohorov

Mizrahi Tefahot Bank Chief strategist Modi Shafrir provides a bullish forecast for the Israeli economy in 2020.

The Israeli economy, despite running with a partially functioning transitional government for a year, has maintained reasonable growth, low unemployment, and very low inflation. The bond market, with strong support from the global bond market, gave investors, long-term savers, and of course stock exchange-listed companies wonderful returns last year, which obviously supports growth. Mizrahi Tefahot Bank (TASE:MZTF) chief strategist Modi Shafrir told "Globes," "The fact that there is no government is really one of the factors that will detract from growth this year. At the same time, there are quite a few positive factors supporting growth. We believe that growth in Israel will amount to 3% this year.

"Growth in 2019 was 3.3%, to which public consumption contributed 0.9%. Public consumption will decline in 2020 because of the 'provisional' budget. On the other hand, there are quite a few factors supporting growth, such as private consumption, the growth trends in the world's main economies, and exports of tech services, which are very dependent on Nasdaq. As long as the trend on Nasdaq is positive, exports of our tech services will continue growing. There's another technical factor - the beginning of natural gas supplies from the Leviathan reservoir. Projections are that Leviathan will contribute 0.4% to growth this year."

The government budget deficit last year was 3.7% of GDP - NIS 52 billion, NIS 12 billion more than the budget target of 2.9% of GDP. Shafrir says that the deficit should be addressed, but that the increase in the deficit is no reason for alarm. "The deficit, which grew in 2019, did not affect the bond market or the interest rate that Israel pays on its debt. Incidentally, the ratio of debt to GDP fell from 61% to 60% last year," he adds.

"Globes": What was the reason for that?

"There were several factors that affected it, such as the appreciation of the shekel against the basket of currencies and the dollar. Moderate inflation also contributed to this, because of a large proportion of the debt is index-linked. Furthermore, in the last two months of 2019, the Ministry of Finance bought back a lot of bonds, so that it would be able to better manage the budget and the deficit in 2020. The deficit grew to 3.7%, and this should be dealt with and not taken lightly, but Israel's situation is fairly good, certainly in a global comparison."

As long as the interest rate is so low, the deficit can be handled by spreading it out more - lowering it gradually over several years.

"I agree completely, and this is also what will probably happen. We have to show the rating agencies that we're taking care of the deficit and are fiscally responsible. It's not necessary to cut NIS 20-30 billion from the deficit in one year; we can cut NIS 15 billion a year for several years."

Will the Bank of Israel lower the interest rate to a negative rate as a result of the shekel strengthening against the basket of currencies?

"We believe that the interest rate may fall once in 2020 to 0.1%, but even if this happens, it will be an insignificant event, and won't really affect the bond market. This is actually already included in prices," Shafrir says. "It's important to note that we don't think that the Bank of Israel should lower the interest rate below 0%, mainly because such a measure is liable to damage economic activity."

The shekel was the world's second strongest currency in 2019

You thought that housing prices would stabilize and later increase last year, and you were right. What do you think now?

"There is already more of a consensus that housing prices will rise this year. There are several reasons for housing prices to rise moderately this year, especially in high-demand areas in central Israel. There is a steep fall in the real interest rate that obviously supports the alternative return on the purchase of a home."

Shafrir adds, "The mortgage interest rate fell steeply in recent months, together with a continual increase in demand and an inadequate level of housing starts. The political uncertainty also supports demand for housing, so it's hard to visualize housing prices not continuing to increase, although in our opinion, the increase will be moderate, not steep. Kahlon will not be the minister of finance or the minister of construction and housing in the next government. There's a continual increase in demand, and the population is growing at 2% a year."

What is your recommendation about investing in the bond market?

"We're fairly neutral right now. We're not predicting either an increase or decrease in returns on government shekel bonds. We recommend being there in medium-duration bonds."

What could change your assessment?

"If there is a rise in global returns, for example. Incidentally, Israel stands to enter the World Government Bond Index (WGBI) in April. The amount of money that follows this index is $2 trillion. Our weight in this index will be 0.3%. We expect entering the index to cause a flow of $3-5 billion into shekel bonds in Israel. To this should be added the fact that bonds in Israel are still being traded at positive returns, and the curve here is still steep. There is more and more worldwide interest in Israel's bonds, so this could have a positive effect on shekel bonds this year."

Inflations expectations for the coming years

What do you recommend now?

"Because of the change in sentiment in the market, we have become neutral, meaning that we recommend keeping medium-duration bonds. In recent weeks, inflationary expectations again jumped to 1.4% a year, starting in the second year. In contrast to the market, we don't think that inflation will reach this level, mainly because there are very strong anti-inflationary forces. There's no real reason for inflation to exceed 1% a year in the coming years. We now think that the capital market is paying quite high insurance for the possibility that the inflation rate will rise, so in our opinion now, it is worthwhile selling medium and long-term index-linked bonds. Shekel bonds are now preferable for investment."

The stock markets in the US and worldwide expect rather impressive recovery in the US and global economy in the next year or two. What do you think?

"The positive cycle in the global economy can continue for several more years. As of now, there is no global recession on the horizon."

The shekel will continue strengthening in the long term

In early 2019, Mizrahi Tefahot Bank predicted that the shekel would strengthen against the euro and the dollar, which indeed happened. The shekel was the world's second strongest currency in 2019 after the Russian ruble according to the fall in its exchange rate against the main currencies.

"The shekel has been on a strengthening trend against the basket of currencies," Shafrir says. "Before 2019, we predicted, fortunately, that the shekel would strengthen, and we were right. Today, also, there are several global trends supporting the shekel's continued strengthening. One of these was mentioned earlier - there's a lot of money in a world of negative interest rates looking for a reasonable positive return. As long as Nasdaq is positive, there's also a lot of money looking good non-financial investments. When you add the $12-14 billion positive balance of payments this year as a result of the start of activity at the Leviathan reservoir, you get a lot of reasons for the shekel to go on strengthening."

Published by Globes, Israel business news - en.globes.co.il - on January 26, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Modi Shafrir  / Photo: Rafi Delouya, ira prohorov
Modi Shafrir / Photo: Rafi Delouya, ira prohorov
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