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(photo credit: Ariel Jerozolimski)
It seems that the Tel Aviv capital market has never been so disconnected from the Israeli reality. Without a doubt, 2006 broke records: The failed war in Lebanon, which led to IDF Chief of Staff Dan Halutz's resignation last week; the coma into which Ariel Sharon sank; the growing corruption scandals in the government - from investigating Prime Minister Ehud Olmert in the Bank Leumi affair to the Israel Tax Authority and sex scandals involving the president and the justice minister. All these led to feelings of revulsion and a lack of confidence by the public in the institutions that run the country, the likes of which haven't been known for quite some time.
Yet, the Tel Aviv Stock Exchange is flying high.
Over the past year, stocks recorded a 12% return, and the bond market also turned in a nice performance, mainly long-term shekel-linked bonds, which delivered an 8% return. In the foreign currency market, the shekel strengthened by 8.2% against the dollar.
The trend taking shape since the start of 2007 is showing a continuation of these increases, at least in the short-term. So how can this detachment between political events and the atmosphere in the Tel Aviv capital market be explained?
"There's really no connection," explains Dr. Asher Blass, former chief economist at the Bank of Israel and currently the state's official responsible for assessing the worth of Oil Refineries Ltd. "Investigations into corruption, even in a prominent economic body like the Tax Authority, do not influence the performance of companies in our economy, which continue paying their regular tax advances. The performance and profitability of most companies continue to rise, the economy continues to grow, and ultimately that's what interests investors."
According to him, the recent political events, such as Olmert's investigation in the Bank Leumi affair and even the IDF chief of staff's resignation, do not constitute real news, and they have already been factored in by most of the market's players.
Another fact that Blass believes influenced the market rises in 2006 and will continue to have an impact in the coming year, is the large surplus liquidity in the market.
"There is a whole lot of money floating around, mainly among the leading institutional investors, and they have no choice but to invest it in the market: to buy stocks and bonds. That's an important factor in explaining the continued rising levels on the TASE," Blass says.
The large liquidity surpluses among institutional investors, such as provident funds, insurance companies and pension funds, are also being used as a central explanation by a senior investment manager at one of those bodies.
"The amount of available money currently seeking investment avenues is huge," the manager says. "Among us, for example, there are those who think the stock market is currently priced high, but money continues to come in, returns must be achieved, and this money gets invested in the markets."
The senior investment manager, who is responsible for investments totaling in the billions of shekels, believes that despite these severe political events and the high probability of elections being advanced, which usually creates the expectation for an election-economic policy, the government bond market is not expected to suffer declines in rates.
"All in all, the government managed to maintain a very low deficit, despite unexpected expenses that were created by the war in Lebanon. Add to that the fact that this year as well redemptions in the government bond market will exceed the money raised by the Finance Ministry, and the picture we see will be a continuation of the rises in the bond market this year as well," the investment manager said in conclusion.
In a special survey, Vered Dar, chief economist at the Psagot Ofek investment house, also tries to explain the apparent anomaly of green screens vs. red headlines.
"The only difference is that living room conversation in the homes of those active on Ahad Ha'am Street are different from the conversations in 'regular' people's homes," Dar writes. In her opinion, the detachment stems from two main factors: The first is the shekel's impressive strengthening, and second the growing influence of world events on the Israeli market, in contrast to the lessening impact of domestic political events.
Those who are active in the market saw the record-breaking foreign investments in the economy, assessed that the shekel would continue to strengthen, forecast interest rate reductions in the wake of that, and deepened their investment in government bonds, Dar says. The assessment regarding the shekel's strength and interest rate reductions, along with market maker reforms in trading government bonds, which boosted foreigners' involvement in the market, strengthened the shekel's appreciation trend and bond market rises.
Dar finds proof of the fact that the market is much more sensitive to what happens globally in the most influential event on the market in 2006; it was neither Sharon's coma nor the war in Lebanon, but rather the synchronized fall in all of the world's stock markets in May, which occurred against the backdrop of a single statement by the US Federal Reserve Board chairman, which was also far from dramatic.
And what about the coming year? Dar believes that 2007 can be expected to be a very good year for Israel's economy and capital markets. In her assessment, GDP should reach 4%, just a bit less than the 5% increase recorded in 2006, in which GDP per capita in Israel reached the fine level of $20,000. This pace would be supported mainly by the continued strengthening of the export industries, which in 2006 grew by about 13%. Dar qualifies her statements, and notes that a considerable slowdown in the pace of growth in the United States, in other words growth of less than 2%, would harm the increase in Israeli exports and the pace of growth of the entire economy.
What could harm the celebration expected in 2007? Dar, in keeping with her outlook that global events have a greater impact than do domestic events, notes that a worsening trend could come from the direction of international financial markets. The probability of such a crisis recently increased, and it now has a 15-20% chance of occurring in the coming two years.
For those interested in wagering on the continued good times in the Tel Aviv markets, especially in the stock market, Dar is recommending companies in the trade and services sector, based on the forecast of a significant increase in private consumption in the Israeli economy this year.
According to Psagot Ofek, another interesting avenue for investment are insurance companies, to whom the Bachar Committee's recommendations opened up business opportunities for offering combined packages of insurance and financial products through effective marketing pipelines that they already control. Dar also mentions Tel Aviv's investment and underwriting firms as an interesting investment channel. In contrast, Dar anticipates that the banks' profits are liable to be even lower than those achieved in 2006.
If one were to accept the explanations of all these experts, it would appear that there is no stopping this celebration, at least not by events on Israel's domestic scene.
In general, the prevailing phrase in the world's capital markets is "the trend is your friend," and it appears that the trend in Tel Aviv today is fairly bullish. In such an atmosphere, anything is reason for additional rises: Olmert will be forced to go? That's excellent, since he is a weak prime minister. Peretz will follow in Halutz's footsteps? Terrific, since after all he is unfit. Elections? That would increase GDP.