After sharp falls in major stock indices in the three weeks following the outbreak of war between Israel and Hamas in the Gaza Strip, the trend reversed this week. In the first two sessions, the Tel Aviv 25 index rose about 3%, although it fell slightly yesterday.
Banks saw the biggest declines yesterday, following a report that the Bank of Israel was considering suspending or restricting the payment of dividends by banks. The TA-Banks5 index has fallen 14% since the start of the war.
Local market participants explained the increases on Sunday and Monday in several ways: from the fact that the fighting on the southern front had not spread to other sectors, to the realization of what it would cost to the economy, going through the increases at the start of the week on Wall Street.
Institutions increase their exposure to the stock market
The Tel Aviv Stock Exchange’s VTA35 « fear index » more than doubled between October 7, the date of Hamas’s incursion into southern Israel, and the end of the month, reaching its highest level since March 2020, date of Russia’s invasion of Ukraine. However, the index moderated slightly in the last days of the month.
Trading volumes on most instruments in Tel Aviv last month were similar to or lower than the year-to-date average. « Since the start of the war, private Israeli and foreign investors have reduced their exposure to the stock market. On the other hand, investment institutions that invest for the long term have increased their exposure, » said sources in the walk.
Eyal Goren, CEO of Psagot Mutual Funds, told Globes: « The war that broke out was a ‘black swan’ that brought a lot of uncertainty, fear and anxiety into all aspects of people’s lives. people. It seeped from personal lives into investment portfolios. « People acted in extreme ways, and that’s what caused stock indexes to fall between 10 and 15 percent at the start of the campaign. In recent weeks, institutions have significantly increased their exposure to Israeli values, particularly Israeli values. « The banks and the shares of the Tel Aviv 125 index. In recent days, the public has come, after the institutions. It’s almost always like that. »
Uncertainty stabilizes
Nobody in the market is talking about the start of a recovery. What happened this week, according to Goren, is that the level of uncertainty on the part of investors has stabilized somewhat, « even though it is ‘bad uncertainty,’ and in this kind of situation, the market can move forward.
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« Investors have now realized that the economy is on the path to recession – it has stopped. We also realized that there is a problem with the functioning of government ministries and that a downgrade in the rating « Israel’s credit could be expected, » Goren said. “Then we took into account that the government would be investing money on the home front, and it looks like the economy is returning to normal under war conditions that could last two years.”
Goren recommends that investors try to neutralize their emotions. « In my opinion, if the banks’ shares are traded at a multiple of 0.75 to the shares, this represents an attractive price for them, even in the event of a long war, an economic recession and the collapse of businesses in Israel.”
Another leading capital market source says: “This week’s stock market rises came too early and do not correspond to the seriousness of the situation. In my opinion, it is too early to increase investments in the Tel Aviv Stock Exchange. With the rise of recent days, the opportunity has arisen to make « retrospective improvements », i.e. to adapt the risk level of the portfolio to the war situation. »
He says the campaign that has begun in the Gaza Strip promises to be a long-term one. « When does the capital market go up? When it sees that the war is about to end. I don’t believe this is the case yet, so the investment portfolio must be balanced. In fact, people should focus on risk management, and should not chase returns. In the spirit of the times, I think we should avoid « grand maneuvers » in our investment portfolios and adjust them gradually. »
Chief economist of IBI Investment House Rafi Gozlan believes that the short rise in the stock market is a normal correction. « This is part of the regular behavior of the stock market, which is not going full force in one direction. We had a streak of down days and, in my opinion, the market has more or less digested the situation that has arisen. created. and made an assessment. This could also be linked to the relative stability that has been achieved in the foreign exchange market, but of course things are very fluid. I think the market has internalized the situation that has occurred . If security If the situation gets worse, this will clearly change. »
The bond market: recovery or pause?
It’s not just the stock market that has suffered upheaval. Yields on Israeli government bonds have been high since the start of the war, indicating an increase in risk in the local economy. Market sources point to the expected economic consequences of the war, which have also led to a downgrade of Israel’s credit outlook by S&P, as well as negative signals from Moody’s and Fitch. “The redemption yield on government bonds of 10 years and above denominated in shekels continued to increase and reached 5.3% at the end of October, compared to 4.4% at the end of the previous month and 3.7% at the end of October. beginning of October. year, an increase which reflects an increase in economic risk », indicates the review of the Tel Aviv Stock Exchange.
“We received clarification from the Bank of Israel during the last interest rate decision,” says Gozlan, “that as long as there is upward pressure on the risk premium, we will not see not the interest rate falls. For investors, yields of 5.4 -5.5% at the long end of the curve are starting to look attractive. »
At the same time, also last month, the public’s trend towards foreign markets and money market funds, to the detriment of local stock and bond markets, continued. According to the Tel Aviv Stock Exchange, the public continued to withdraw money from funds investing in securities in Tel Aviv, mainly bonds, and to invest money in mutual funds investing abroad and in interest-bearing money market funds (which are similar to bank deposits). 3.2 billion shekels were repurchased from bond funds in Tel Aviv in October, following redemptions totaling 21 billion shekels between the start of the year and the end of September. 5.9 billion shekels flowed into money market funds last month, following an inflow of 42 billion shekels between January and September.
What to do with the investment portfolio?
The senior market source we spoke with said: “You cannot look at the stock market in Israel as a whole. Supermarket chains probably benefit to some extent from a period like this, as people stock up on food and essentials, Insurance companies are more affected, as stock market declines affect their investments of market, while the risk premium of the policies they sell increases. The propensity to invest abroad is always justified. The US economy is performing well and the third quarter corporate earnings season was, overall, positive. »
How to build a portfolio of up to 30% stocks?
“I would buy 15% foreign stocks, 12% Israeli stocks and keep 3% in cash or deposits. For the 70% fixed income, I would have a layer of government bonds to reduce risk, and also for good. liquidity. The fixed income portion would be made up of 40% government bonds, half indexed and half in shekels. The remainder would be held in dollar-denominated corporate bonds and U.S. government bonds. These are relatively high proportions. for a local investment portfolio.
The foregoing does not constitute investment advice or marketing taking into account the particular circumstances and needs of any individual.
Published by Globes, Israel Business News – fr.globes.co.il – November 1, 2023.
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