Back to safe haven assets?

Positive economic developments in the domestic market and mixed indicators from the USA and the Euro-Zone may cause volatility in the equity market.

By ARIE TAL
September 3, 2009 14:51
2 minute read.
Back to safe haven assets?

arie tal 88. (photo credit: )

Investors' Vertigo: In the past week, equity markets around the globe were in a bearish mode. The effect was felt in the domestic market. Tel Aviv 25 Index lost more than five percent after reaching the highest level in almost a year on August 25th (1002 points). Since that day, the index ended five out of six trading days in a negative territory on concerns that stocks are overbought. Stocks may have fully priced in the improvement of the economic environment after Tel Aviv 25 Index increased by 69% and the Real Estate Index has skyrocketed by 156% from its lowest point reached on December 28rd. Positive economic developments in the domestic market and mixed indicators from the USA and the Euro-Zone may cause volatility in the equity market. In addition, the concerns over high level indices among investors may cause a short-term selling pressure. Investors may close positions and take profit which can fuel a domino effect. The result may be further declines. However, from a medium to long term perspective, continuous improvement of the real economy supports the equity market. Africa's Side-Dish: Another negative market indicator came from the corporate side in the beginning of the week. Africa Israel Ltd ("Africa"), which is owned by Lev Leviev, presented its financial documents for Q2 and revealed its debt problems. Unsurprisingly, both stocks and corporate bonds reacted negatively to the developments in Africa. Currently, there is a lot of uncertainty on whether the company will be able to restructure its debt and reach an agreement with its bondholders. Obviously, the company will not be able to fully pay its current debt and many bondholders will have to soak up the loss. Africa's Side-Effect: The Treasury Department and Bank of Israel announced that the risk to financial institutions is minimal. However, the concern is that Africa's saga may open doors to other financially-challenged companies that would also want to get a "discount" on their debt. As a result of this concern, high-yield corporate bonds fell in the last four out of five trading days. The negative trend was led by the real-estate sector where Boymelgreen bonds' series and Calcalit Jerusalem's bonds, owned by the businessman Eliezer Fishman, where in the vanguard. Due to the last developments, real estate and high yield bonds may be negatively affected and suffer from a selling pressure in the near future in this asset class. The Return to Safe Haven: The government bonds market functioned as a safe haven for investors in the past week despite the interest rate hike. Given the high equity indices and the concerns over profit-taking, investors prefer to divert investment from high-risk assets to low-risk. The expected passive and gradual rate hikes over the next year, the low volume bond issuance over the next three months (10.5 billion ILS), and the reaffirmation of Moody's credit rating support the government bonds market over the short term and a further strengthening of the domestic currency against the dollar. The writer is Chief Analyst and Strategist at Alumot-Sprint Investment House and also a regular writer for several leading financial papers and websites


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