Capital markets in the midst of economic improvement

Capital markets in the m

By ARIE TAL
The positive trend in the domestic stock market continues, followed by the worldwide trend. The main index in Tel Aviv stock exchange (TASE), Tel Aviv 25, reached a 15-month high, after climbing 70% since the beginning of the year. The real estate index jumped by 120%, the financial index rose 112% and the technology index increased by 82%. The small caps indices are leading the rally in Tel Aviv after skyrocketing by more than 150%. Tel Aviv 25 index is approaching its all time high level - 1237 points - which is just 12 percent from the current level. The historical highest level of the index was reached on October 31st 2007 during the heydays of Israel's economy. The domestic business sector expended in all directions and the consumers joined the party. Nowadays, the economic situation is different than it was back in these days. Then why the stock market is booming? What is the main factor that pushing stocks so fast and so far? The main factor that is fueling stock markets is the interest rate. Not the one in Israel, but the one of Uncle Sam's. The interest rate in the USA is in its all time low and it is expected to remain at that level for extended period according to the American policy makers led by Chairman Bernanke. Low rate borrowing-cost makes credit and spending cheaper and more attractive compared to saving. However, investors' expectations and stock market momentum may change whenever interest rate estimates will change direction. In addition, the trend sustainability depends also on economic recovery and companies' earnings. From the macro perspective the picture continues to get brighter but mixed as well. Most economic indicators reflect a stabilizing trend and a move toward economic expansion worldwide. A continued rise in demand and production is expected according to the consumer confidence and purchasing managers' surveys in the US. The stabilization and subsequent restfulness in financial markets contributed greatly to restoring consumers' and investors' confidence. The US housing market shows signs of recovery and retail sales rose in the last three months. In the domestic market, the improvement in real economic figures is also continuing to stabilize. As published last week by the Central Statistics Bureau this week, during Q3/09, the Israeli economy grew at an annualized approx. 2.2%, compared with Q2/09. The importance of this parameter is the positive per capita growth, after four successive quarters, during which per capita growth was negative. In spite of this cheering picture indicated by the macro indicators and the price hikes in the stock markets, which express expectations of a continuous significant improvement in company results, which are currently being published indicate mixed results across most sectors. Looking at the whole picture, the positive trend is expected to continue, in view of the improvement in the macroeconomic arena and the low interest rates and yields which support the domestic equities market. Nevertheless, the low price levels in the equities market is not low compared to historic levels and, as a result, it appears that if price hikes persist in the market, their rate is expected to be measured and volatility is expected to remain high. Be cautious! The writer is Chief Analyst and Strategist at Alumot-Sprint Investment House and also a regular writer for several leading financial papers and websites