Avishai Karavani is the CEO of Peilim Portfolio Management, one of Israel’s leading investment portfolio management companies. Founded in 1987, the company is wholly owned by Bank Hapoalim. Peilim specializes in investment portfolio management for private clients, public and private companies, and government agencies.
Looking back at 2021, what has been the biggest surprise for you?
In my view, the impressive strength of the economic and financial recovery in 2021 from the recession and pandemic fears of 2020 has been the biggest surprise this year. Putting things into perspective, it was about a year ago that the FDA approved the new vaccinations in the United States against COVID-19. Since then, we have developed new remedies for the virus. This has enabled the entire world, and of course, Israel, to reduce lockdowns and begin a process of normalization of all activities.
How do you view Israel’s performance in this context, compared to the rest of the world?
Israel’s economy has been doing extremely well, given the circumstances. The 2.2% drop in GDP growth last year has been smaller than the 3.1% decline in the rest of the world. In addition, our labor market has been recovering quickly, with rapid growth in employment and a major decrease in the unemployment rate. The Israeli Shekel has become one of the world’s strongest currencies, inflation has remained low, and our stock market indices have been booming, especially in the banking, financial, and real estate sectors. Finally, our government budget deficit figures have been much smaller than previously anticipated.
How has Israel been able to deliver such good results relative to other advanced countries?
A few factors have combined to deliver the preceding satisfactory results. First, Israel was among the most aggressive countries in the world in the early acquisition of vaccinations and their wide distribution to the population. Second, being a start-up nation and not a heavy industrial country, Israel has not suffered as much as other countries from the disruptions to the global supply chain due to COVID-19. Third, during 2021 a new government was formed, and a public sector budget was approved for 2022. This has added certainty and confidence to the economy. Fourth, with the significant global boom in technology sectors, there have been various exits by Israeli startups, some of which resulted in IPOs in major bourses around the world. As a result, an inflow of foreign exchange and liquidity has come to Israel, with economy-wide consequences.
As the CEO of Peilim, how do you view the behavior of the global financial markets in 2021?
No doubt, this has been an excellent year for financial markets. In my view, the key fundamental is monetary policy, which has continued to be widely expansionary. This, of course, goes together with another fundamental: the recovery in the real economy because of advances in the vaccination process. The current low interest rates coupled with liquidity increases via quantitative easing have given significant support to financial markets and the real economy. Looking at companies’ performances as revealed in their quarterly reports, it is impressive how revenues and profits have grown in this year of economic recovery. Clearly, the primary beneficiaries have been equity markets. Among these, we especially like the United States and Israel.
Aren’t you concerned about the recent rise in the inflation rate? In the U.S., annual inflation until November has reached 6.8%!
Obviously, the rise of inflation is a source of concern. Yet, we must consider that a large component of this rise relates to transitory factors, especially those “cost-push” factors that derive from the global supply chain disruptions. If that is the case, sometime in the first quarter of next year, we should start seeing a gradual decline in inflation rates all over the world, as some of the previous disruptions begin to ease. It is remarkable that despite the unexpectedly high inflation in the U.S., inflation expectations for the next five years and beyond remain quite moderate. In my view, market participants should treat the current inflation rise as transitory.
What is Peilim’s outlook for markets in 2022?
We remain cautiously optimistic. Caution is especially needed given the continued spread of Coronavirus, including the Omicron variant, and the major rise in stock market indices this year. We believe that central banks will be very gradual in the process of normalization of monetary policy. The Fed’s tapering is likely to continue at the pace already announced. While markets expect about two interest rate hikes by the Fed next year, we may end up with only one such hike. In any case, real interest rates will remain low and negative, and there are still plenty of funds in a wait-and-see mode, and these can return to financial markets as soon as there is more clarity and certainty about the pandemic. As in 2021, we recommend that our clients focus on markets in the U.S. and Israel. The situation in Europe remains fragile, especially with respect to the virus, and that is also the case for emerging market economies.
In summary, we suggest that after a year of highly impressive financial performance, investors lower their expectations for 2022. Returns should be positive and reasonable but lower than in 2021. In our view, opportunities rely more on making the right choices of sectors and companies than on broad indices. We like sectors like technology, financials, health, industry, and infrastructures. Broad portfolio diversification with emphasis on the proper sectors should be a winning strategy in the coming year.
This article is taken from The Jerusalem Post Annual Executive Magazine 2021-2022. To read the entire magazine, click here.
This article was written in cooperation with Peilim Portfolio Management