Egyptian unrest rocks the market

In times of uncertainty the best thing to do is to stay on the sidelines, even if this means missing an opportunity.

Protesters in Tahrir Square barbed wire 311 AP (photo credit: AP)
Protesters in Tahrir Square barbed wire 311 AP
(photo credit: AP)
The recent events in Egypt have had a strong impact on trading on the Tel Aviv Stock Exchange, and as long as uncertainty continues it is likely to continue to influence the local market.
In times of uncertainty the best thing to do is to stay on the sidelines, even if this means missing an opportunity. The state of Israel has witnessed two extreme geopolitical events in recent years – the operation in Gaza and the Second Lebanon War. The impact of the two events on financial markets, in the long-run, was marginal. On the other hand, if protests spread to other countries in the region and governments collapse, it may have a stronger impact on Israel than even a war.
At this stage, the risk premium of the whole Middle East rises and the spread on Israeli credit-default swaps (CDS) has risen from 120 to 160 points. It is hard to estimate, at this stage, if the negative trend will last for several weeks, days or just hours. Overall, the global economy is recovering, but analysts are still expecting a correction on global markets.
Investors should also realize that after rising by more than 30 percent since July, the markets need to slow down before they can rise again. It is unclear if the markets will use this opportunity for the much anticipated technical correction and profit taking as high liquidity and the lack of other alternatives are pushing investors back to the stock exchange.
In recent weeks, the dollar has appreciated by some 3.6% against the shekel, despite the weakness of the American currency against the euro. Recent moves by the Bank of Israel and the Finance Ministry aimed at restricting foreign investors, as well as events in Egypt, have contributed to the dollar’s strengthening. A sharp appreciation of the dollar in the short-term may force a large number of speculators to abandon the market. This may lead to a further depreciation of the shekel and increase the number of those betting against the local currency.
We believe that the trend of inflow of hot money into the Israeli market will slow, leading in turn to a rise in Makam (one year notes issued by the Bank of Israel) yields.
Once the geopolitical situation improves, positive macro-economic indicators and expectations for strong quarterly reports are expected to continue and to fuel the local stock exchange.
We recommend that investors focus on the local banking sector and commodity companies.
In the debt market, we have returned in the last several weeks to a balanced portfolio of linked and unlinked bonds. Despite that, we estimate that as inflation expectations are fully priced there is a slight advantage for unlinked bonds. We prefer, however, to adopt a “wait and see” approach, as the Bank of Israel has very limited maneuvering space to try to fight inflation expectations.
As for bonds with variable interest, we prefer corporate bonds that offer a premium in comparison to state issues.
Yaniv Hevron is the head of macro-economics and strategy at the Excellence Nessuah investment house.