There is no doubt that the uncertainty in the political arena weighed on trading in Tel Aviv during 35-90, which performed inferiorly compared to stock exchanges around the world. While the Tel Aviv 2 and Tel Aviv 6 indices ended 500-600 with a retreat of about 10% and about 20%, respectively, the US S&P<>, the Stoxx Europe <> indices and MSCI EM (emerging markets worldwide) show gains in the range of <>-<>%.
This is despite the fact that basic macro data in Israel are good by international comparison and convey resilience, inter alia in growth data and labor market data. True, some of Israel's macroeconomic conditions have worsened over the past year and a half, led by the high inflation rate and widening deficit, and it must still be said that Israel's macroeconomic situation is good by international comparison.
As noted, the main reason for the gaps between TASE indices and stock exchanges around the world is the political uncertainty, which stems from the coalition's unilateral gallop toward legal legislation. At the end of 2022/23, investors in the domestic capital market suffered from significant uncertainty, which was reflected in the diversion of institutional investors' investments abroad and a decline in the volume of foreign investments, all of which adversely affected TASE's performance.
Is it time to escape?
As is well known, the performance of equity indices has a significant impact on citizens' pension portfolios, so the question is: Is the underperformance recorded on TASE in 2022/23 actually an investment opportunity for next year, or is it time to escape the stock exchange? It depends on who you ask.
"The Tel Aviv Stock Exchange's underpricing may be an interesting starting point for 2024," Migdal Capital Markets believes, marking the banking and residential real estate sectors. "Assuming that the political conflict that accompanies us is resolved later this year, this may give a significant push forward to indices that suffered from uncertainty in the political arena over the past year. On the other hand, if political uncertainty continues to accompany us, the local stock exchange may suffer from relatively high volatility in 2024-2024."
Looking at the branches of activity in the domestic market, Migdal Capital Markets notes the banking sector, which benefits from the high interest rate environment that helped the banks increase their profits, so that despite the changes in the macro environment as mentioned, they continued to demonstrate strength. The strength of the Israeli economy, together with streamlining measures adopted by the banks, may help them continue to show growth in 2024-2024 as well.
Name of the game: interest rate
Leader Capital Markets is less optimistic about TASE's performance in the new Hebrew year. Alon Glazer, the company's vice president, told Israel Hayom: "As long as there is no solution to the political-legal issue, our stock exchange will continue to underperform the world. The combination of high interest rates, a slowdown in Israel and abroad, and disputes in Israel will continue to have a negative impact, and only if broad agreements are reached is it worthwhile in my opinion to invest in the local stock exchange.
"At this stage, I prefer to stay away from sectors related to the domestic economy, including the banking sector," said Glaser, who specializes in banking and insurance analysis.
The shekel weakened, photo: Joshua Yosef
Ronen Menachem, chief market economist at Mizrahi-Tefahot, notes: "The stock market is expected to be affected in the coming year by the high interest rate in Israel directly, and also by the high interest rate abroad indirectly. The Hebrew New Year will be a test year, a very challenging year for the Israeli economy, and of course for the stock and foreign exchange markets.
"Having said that, the research department at Mizrahi-Tefahot Bank emphasizes three interesting sectors for examination in the coming year. The first is the oil and natural gas sector, against the background of the expected increase in natural gas exports from the Leviathan reservoir, the expectation of continued growth in demand in the domestic market following the withdrawal from coal until 2025, and against the background of the continuing boom in oil and gas prices."
The second sector noted by Menachem is banking, similar to Migdal Capital Markets' position: "The banks are likely to give an excess return on market performance this year. This is based on expectations of continued double-digit returns on capital, which gives attractiveness to their capital multiples. This assessment takes into account the assumption that the interest rate will remain high this year as well. Such an interest rate will have a positive effect on the banks' revenue side. On the other hand, what can cool this is the moderation on the credit side, as a result of the certain slowdown in the economy," Menachem explains.
Ronen Menachem, Photo: Mizrahi Tefahot
"The third interesting sector is the defense industry, which gave excess returns last year as well. This is due to the continuation of the war between Russia and Ukraine and the reputation that Israeli companies have in this field."
The gaps are only growing
According to Menachem, "The impact of the legal-political issue is decisive for TASE's performance from the beginning of the Hebrew New Year, against the background of the upcoming High Court hearings and the growing tension in the political arena.
Dollars, photo: Reuters (illustration)
"At the moment we are witnessing not a rapprochement, but more a separation between the sides. This is of additional importance, in view of the fact that all the credit rating agencies that have recently issued reports on the State of Israel have repeatedly said that a condition for a positive development on the rating issue is broad agreements on the subject of legal legislation. If each side continues to entrench itself in its positions, it will have a bad impact on the stock market, both on sentiment and on the economic level, and at the same time it will also have an impact on the continued depreciation of the shekel against the dollar."
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