The bottom line is completely clear: the Tel Aviv Stock Exchange (TASE) has beaten the world's main indices over the past year. No less interesting is the fact that this has held true in the past month, when war has broken out in Europe, making stock markets very nervous, with most of them falling sharply.
It isn't as though investors in Tel Aviv have escaped the declines. In the past month, the Tel Aviv 35 Index and the Tel Aviv 125 Index have each fallen by about 3.5%. These, however, are much more moderate declines than those posted by leading indices such as the S&P 500 in the US and the FTSE 100 in the UK, which have each lost about 6%. The gap is even greater versus the Nasdaq indices and the DAX in Germany, which have lost about 10% in this period.
Measured over the past year, the gaps are even wider. The Israeli indices have risen by nearly 20%, while Nasdaq, the DAX, and especially the Nikkei have posted negative returns.
It should be pointed out that the TASE made its great leap forward last year, after falling a long way behind the New York exchanges in 2020. Taking a three-year view, the local exchange is still ahead of the main indices in Europe and Asia, but it's behind the US indices. While the Tel Aviv 35 Index rose 23% in this period and the Tel Aviv 125 40%, the Nasdaq rose 67% and the S&P 500 49%.
Record foreign investment
They say that success has many fathers, but in the case of the TASE there truly are several reasons for its recent performance. "The main reason that the Tel Aviv Stock Exchange has outperformed is the performance of the local economy," says Meitav Dash chief economist Alex Zabezhinsky. "Israel is one of the countries that has recovered from the Covid-19 pandemic, or is in the process of recovering, best in the world. Growth last year was close to 8%.
"Besides that, at least until a short while ago there was very strong hype, globally, over the technology sector, and Israel stands out in that respect. That affects the Israeli economy much more broadly than just the stock exchange - in tax revenues, in exports, and in consumption," Zabezhinsky adds. "Beyond that, in 2021 foreign investors spent close to $4 billion on buying stocks on the TASE, an all-time record."
Zabezhinsky says that the mere fact that a government arose in Israel that passed a budget and approved major reforms, after two years in which the country was run without a budget and without planned economic activity, had a positive effect on the desire of investors to put their money into Israel.
"Another thing, which hasn't happened yet but will happen within the next year, and could be something that investors are constructing plans about, is the abolition of the designated bonds that the state issues to the pension funds," Zabezhinsky points out. He estimates that this move "will switch money released from investment in these bonds to equities in Israel. This is a matter of several billions of shekels a year, every year."
IBI Investment House chief economist Rafi Gozlan points out further reasons for the relative strength of the local stock market. "We may be the startup nation, but that is not reflected in the leading stock indices in Tel Aviv in the way that technology stocks affect indices in the US," he says.
"A far as the structure of the main indices is concerned, in Israel, financial and real estate stocks carry greater weight, and these are not growth stocks so much," he explains. "You must remember that a certain rise in interest rates works in favor of the financial sector, chiefly for the banks, which emerge from a zero interest rate environment. To that we should add the expectation of a faster interest rate rise in the US, which hits the multiples of technology stocks."
Gozlan points to other sectors that have a high weighting in the local stock indices and are tending to produce excess returns, especially since the outbreak of fighting in Ukraine: fertilizers, for example, because of the pressure on commodity prices, boosting shares in ICL and indirectly in its parent company Israel Corporation. He also mentions the energy crisis in Europe as a consequence of the conflict, which has lifted renewable energy stocks, and another sector that has stood out because of it, namely defense, which is heavily represented in the main stock indices in Israel.
High growth prospects
The main question is whether we will continue to see the TASE outperforming leading indices around the world, and if so for how long. "The local market has fallen by less than other markets since the tension began in Ukraine, and so when we see the geopolitical situation calming down, it will also rise less," Gozlan says. "All in all, the local market is much less volatile, and I wouldn't ignore that parameter, because we have seen that markets can go from euphoria to depression, and the other way around, very quickly."
Nevertheless, he says, "If the geopolitical situation continues to be bad with no solution in sight, we will feel the slowdown more in the Israeli economy, and in the rest of the world, particularly in Europe. Because there is much more moderate pressure on interest rates in Israel than elsewhere in the world, even if the situation in Europe deteriorates, our market will achieve better returns."
Zabezhinsky too thinks that at the moment there are good reasons to believe that the Israeli market will continue to outperform. "Israel still enjoys many of the advantages that have brought it excess returns recently. This year too, our economy may well grow faster than the economies of other countries, because of actions taken by the government. Unless there are unusual security events, there are grounds for assuming that the Israeli market will continue to perform well this year."
Zabezhinsky adds that, as a result of the war in Europe, some countries could experience negative growth, and the question is to what extent Israel will be hurt. "If you look beyond this year, with the hope that the event will not drag on, Israel benefits from several positive factors, such as a strong technology sector and a growing population, and if there is also an influx of people from Russia and Ukraine, that will boost consumption.
"If whatever kind of government we have continues to function and make long-term decisions, then we will see the economy in a good state. But we are dependent on the world, and if it slides into recession, Israel will not be an island of stability," Zabezhinsky warns.
What could make the difference between the performance of the stock market here and in Europe, the US, and other places?
"There are countries that are much more exposed to the risks arising in Europe, and they will have to invest much more in defense, which will be a drag on growth.
"In addition, inflation of course looks much higher in Europe and the US, and it will presumably rise in Israel, but it could be that some of the effects will not apply here. The price of gas is an example, so the rise in prices will be smaller than in other countries. In other words, on the inflation and interest rate front, the risks elsewhere in the world look higher than in Israel.
"China is a separate story," Zabezhinsky stresses. "There's a real estate crisis there coming after years of the sector being bloated, and to that must be added the consequences of regulatory intervention that still continues. At the same time, the Americans are pressuring the Chinese companies, and in the past few days we have seen reports of an intention to delist them from US exchanges. And in the background there is still Covid-19, and Chinese policy is zero tolerance for the virus. It has recently been reported, for example, that a city of seventeen million people has gone into lockdown because of a few dozen patients. So as far as the quality of management of the Chinese economy is concerned, the situation is only becoming worse."
Interest rate a negative factor for risk assets
Which sectors are worth investing in, and which should be avoided?
Zabezhinsky: "I would recommend investing in products that provide protection against inflation. Index-linked bonds, for example, commodities, or stocks in the materials sector. Stocks belonging to the current consumption sector are also worthwhile."
Gozlan: "The energy and defense sectors are emerging as the main gainers from the deterioration in Ukraine. Countries will want to insure themselves against the kind of craziness we have seen from Russia, and in addition countries will not want to be dependent on foreign energy sources, and will prefer to rely on their own renewable sources.
"In the immediate term, beyond the geopolitical situation, there is of course an inflation problem, particularly in the US, and to a lesser extent in Europe, and even less in Israel. Until we see the situation calming down and interest rates returning to a low environment, that will be a negative factor for risk assets, and it's necessary to be more defensive. This is not the time to invest in niche companies or in leveraged companies. This is a process that will be with us at least for the next few quarters, in the hope that the interest rate hikes will be enough to moderate inflation, and we will not need more extensive moves."
Published by Globes, Israel business news - en.globes.co.il - on March 15, 2022.
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