Israel's TA-25 stock index is one of several international indices trading at record highs despite recent turmoil prompted by the US subprime mortgage crisis and market strategists believe gains are set to continue.
"No one would have predicted that the rebound on the markets and the positive sentiment would come so fast just three months after the burst of the subprime mortgage crisis in the US," Erez Britt, CEO of Tandem Capital, told The Jerusalem Post in a telephone interview. "This change of direction in the global equity markets does not necessarily mark the end of the problems in the real estate market and subprime mortgage market. The concern over the subprime crisis will continue to lead to higher volatility on the world's capital markets in the short-term but growth rates are now expected to slow rather than reaching the dimensions of a recession."
Jonathan Golub, chief investment strategist at Bear Stearns & Co., predicts that the Standard & Poor's 500 Index, which was at a record 1,570 on Thursday, will climb to 1,700 next year fuelled by strong global economic expansion, low interest rates, "solid" earnings growth and "reasonable" stock valuations.
As for local markets, developments globally remained the most dominant factor affecting the behavior of the Israeli stock market over the past months; August ended with price declines in all the leading indices in the local stock market, while already September saw modest increases. The real estate sector which was hit hardest in August with a 9.8% drop recorded a 1.4% rebound in September. The Tel Aviv-25 index rose 7.7% in September and the TA-100 index was up 6.6%. The banks turned out to be the month's winners of the month with an increase of 10%.
"The overall global outlook for the stock market remains positive as the present growth in the Israeli economy is based on consumption and investment as well, not only on exports which are tied to the US economy and are negatively influenced by a weakening dollar," said economists at Bank Hapoalim.
Meanwhile, Tandem Capital's Britt said the positive sentiment in the global and local equity markets were the result of the stringent measures taken to control the subprime mortgage crisis and facts about the growth of the global economy.
"The stabilizing effect of the central banks' actions showed that they have their finger on the pulse to take strong measures to prevent the liquidity crisis from becoming a full-scale economic and financial crisis," he said. "Actions such as the 0.5 percentage interest rate cut by the US Federal Reserve calmed the panic in the markets and started to bring back investor confidence."
As long as a US economic slowdown does not develop into a recession, strategists believe the adverse impact on the rest of the world will be limited.
"While before there was the fear that the US economy could be heading into a recession, the majority of predictions now are for a slowdown, which has calmed the markets and returned the positive sentiment," said Britt, adding that despite the US slowdown it's now believed that the rapid expansion of the global economy will continue.
Similarly, Vered Dar, chief economist at Psagot Ofek Investment House said expectations of a "soft landing" of the US economy represented one of the major drivers of both local and global markets.
"The current environment is constructive for stocks," said Dar. "Stock markets do not like rapid growth. Instead they welcome a slowdown of growth, which in turn means lower interest rates leaving no alternative but invest in the equities markets."
She cautioned, however, that although the stock markets rebounded following the subprime mortgage crisis, the money and credit markets, such as commercial papers, had not yet come back.
"The stock market could be wrong, but only the developments over the next months will be able to tell if we are really past the crisis," Dar said."