Israel Leading Indices for the past year: TA-25 (w.
(photo credit: none)
The domestic stock market's investors has enjoyed 2
consecutive quarters of positive returns. In fact, the Israeli equity
market bottomed in the end of November, and almost since then was on a
sharp takeoff. The main index Tel Aviv 25 increased by 63%, Tel-Tech 15
rose 79%, the Banking Index doubled its value, and the Real Estate
Index advanced the most - 150%. This ride has been supported by
continuous increases in trading volume which recently averaged ILS 2.3
billion, compared to an average of ILS 1.5 billion since the beginning
of the year.
Several parameters support this powerful trend:
first and most important is the aggressive stimulative policy of BoI
and other major central banks - mainly by slashing rates close to zero
and increase money supply. Second, Israel recession is on track to end
probably in the last quarter of 2009, supported by financially strong
consumers and international trade revival. The US and global recessions
are also on the same path and it certainly supports the public optimism
and foreign investors' sentiment. Consequently, institutional investors
around the world keep allocating more cash toward stocks after facing
increasing pressure to commit funds to the market in order try
offsetting the losses from 2008. Thus, stock prices may rise even
further and sharper in the coming months.
However, alongside the positive trend, investors should be
cautious in implementing a higher-risk investment strategy. There are
still many reasons to be concerned about the economic outlook, both
from a short-term and long-term perspective, and an additional U-turn
in the real economy will change investors' optimism and preferences
toward high-risk financial assets.
The crawling out of recession will not be short and smooth.
There are several growth obstacles such as regulation, credit
deleveraging, continuous decrease in production, increasing
unemployment, and future contractionary fiscal policy. Additionally, an
aggressive interest rate increases due to a potential inflation
outbreak may paralyze demand for stocks and cause a selling pressure in
the domestic market.
The cost of living rose by an annual rate of 3.6% in
the month of June. The overall inflation of July-August should grow by
1%-1.5% according to various forecasts. At the same time, inflation
expectations that are derived from the government bond market went up
sharply in recent months. Today, the bond market prices 4% inflation in
the next 12 months where the inflation target range of BoI is 1% to 3%.
Also, the market prices more than 3% annual inflation in the next 8
years. Consequently, the zero-coupon bond market (Makam) prices an
interest rate increase of 50 basis points by the end of the year, and
100 basis points by the end of the first quarter in 2010. If the BoI
will start increasing rates aggressively accordingly to market
expectations the demand for stocks may dry up and a temporary selling
pressure may occur.
Bottom line, the combination of pro-growth policies and an
economic revival have increased investor optimism. Momentum is helped
by international stock markets, mainly from the financial district of
New-York which dictates the tone of the global markets. Also,
institutional investors and private ones who have been underweight
equities continues to allocate more cash toward equities, in order to
not miss the opportunities for gains and to offset the losses from the
last brutal bear market. These factors increase the likelihood of
additional gains in the financial markets in the short run. Despite the
recent optimism, investor should be cautious, especially because of the
forceful rally since the beginning of the year in Tel-Aviv
addition, the mid-long term economic outlook still consists of bleak
elements and uncertainties, especially in the case of the developed
economies in which we are heavily dependent on. As a result, the stock
market may be affected negatively by the potential future developments
and thus investors should not be over exposed to high risk assets. The writer is Chief Analyst and Strategist at Alumot-Sprint Investment House and also a regular writer for several leading financial papers and Web sites