"Although it is completely justified, and there’s a consensus on that in Israel, war costs money, and it has to be financed," says Dr. Ron Eichel, a market expert and analyst for 25 years. "The State of Israel entered this war in a generally good fiscal situation, even very good: a low debt to GDP ratio of 60%; a fairly low fiscal deficit, of 1.5% in September; and a comparatively reasonable annual growth rate, of 2.8% in the third quarter. Had the economy been in a different situation, it would have been much more difficult to finance the war," he says.
Eichel, today a consultant to financial institutions and a lecturer, served as chief economists at several investment houses, including Meitav and Colmex. He agrees with those who see the current fighting in the Gaza Strip as different from previous IDF operations. Estimates of its cost are between NIS 150 million and NIS 200 million. Eichel estimates that Operation Cast Lead in 2008-2009 cost NIS 3.3 billion; that Operation Protective Edge, which lasted 51 days in 2014, cost NIS 7.8 billion; and that Operation Guardian of the Walls in 2021 cost NIS 4.5 billion.
This time, however, the global macro-economic situation is different: interest rates are high, at 4-5%, and so the cost of raising debt by the Israeli government has risen, and will be a burden on the economy for many years. "The state has to take large loans at high rates," Eichel says. "If they take NIS 140 billion, the money will have to be repaid over 20-30 years, the period of the bonds that the state issues, when, were it not for the war, this money would have been used for civilian purposes and to improve the quality of life."
All the same, Eichel expects that the state will succeed in raising the amounts it needs. "It looks as though the Ministry of Finance will manage to get through the crisis in reasonable shape. It is trying to raise half the cost of the war overseas, about NIS 60 billion. The Americans will inject another NIS 60 billion, so that the local market will have to contend with raising debt of the order of NIS 70 billion - not a negligible sum, but the local market will have no problem in absorbing it over a year," he says.
It is generally said that wars are followed by economic booms that compensate for the damage that the war caused, but Eichel pours cold water on that idea. "They say that wars create economic booms, but it isn’t true. After a short round of fighting, the economy revives quickly. If the damage is just for one quarter, we’ll see a 10-20% decline in activity and rapid rehabilitation afterwards. Even two to three quarters is OK.
"But if a war lasts longer, there’s a permanent loss of product that will never come back. It’s like someone who flies abroad once a year. If, one year, he doesn’t fly, he won’t fly twice the next year to make up for it."
One of the most prominent features of the local market is the continuing weakness of the shekel against the US dollar (19% depreciation in two years, reaching 30% at the beginning of the war). In 2022, the reason for the depreciation of the shekel was the declines on US stock markets, and in 2023 it was the judicial overhaul legislation and the protest movement against it, and then the war. In late October, the shekel dollar rate was at NIS 4.08/$, although it has changed direction since then, partly, it would seem, because of the program of selling dollars announced by the Bank of Israel. The rate is currently around NIS 3.7/$, representing about 9% appreciation from the weakest level.
"The Bank of Israel is more of a goalkeeper than a forward," says Eichel. "It isn’t trying to change the trend, but only to stop the depreciation. The shekel-dollar exchange rate is affected by the country’s risk level, and its perceived risk. The depreciation was not surprising; the very rapid appreciation is. From an economic point of view, the shekel is still significantly undervalued. Without the events of the past year, it should have been at NIS 3.2-3.3/$. Inflation around the world is higher than in Israel, and so the shekel should have maintained its strength."
Nevertheless, Eichel believes that the shekel is liable to go back to weakening against the US dollar. "A technical correction can be expected, because the shekel has strengthened very significantly recently, and there are many market players who expect it to weaken. You have to remember that, even in calmer times, the foreign exchange market was very volatile. I therefore recommend people exposed to the shekel to hedge themselves, and certainly not to take positions in wartime."
As for the real estate market, which ground to a halt following the rise in interest rates, Eichel estimates that, while it has stopped, it has not changed direction. "The real estate market will revive at an early stage, because there is natural demand: the population is growing and there is a continual need for tens of thousands of homes annually. The market put the brakes on hard, and that makes sense. Within a few months, the Bank of Israel will cut interest rates, and so after the war the market will revive and there will be strong demand."
"Gold doesn’t pay interest"
The crypto and gold markets have risen substantially recently, with Bitcoin above $40,000 and gold above $2,000 an ounce). "Crypto moves fairly strongly with risky assets. When Nasdaq rises, crypto rises. It’s a very high risk product, and not an alternative to the stock markets. Gold doesn’t pay interest, and so I don’t think it’s interesting," Eichler says.
On building a portfolio appropriate to the times, Eichler says, "The Tel Aviv market isn’t currently pricing in a catastrophe, and so it isn’t cheap in any absolute sense. I would give preference to the banking sector, which in my view is underpriced, with relatively attractive multiples. It is not worth being exposed to bonds and shares of construction companies, and one should be wary of real estate development, offices, and non-bank credit companies." In any case, Eichler says, exposure to equities should chiefly be in the US, in technology, banks, and defense companies."
Published by Globes, Israel business news - en.globes.co.il - on December 5, 2023.
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