The stability of the Tel Aviv Stock Exchange (TASE) indices in the face of the momentous security events taking place unquestionably presents a real puzzle to average investors unfamiliar with the forces affecting local trading. At this point in time, no one can predict with any precision when the security events will come to an end, so any attempt to attach an economic price tag to the situation is unfounded. What can be done is to understand the source of the relative stability in the local share indices. The following are the six main reasons for the currently prevailing situation in the domestic capital market:
1. The market stability, despite the war in Gaza and the rockets landing on central Israel and beyond, is first and foremost a result of the great lesson learned by an entire generation of investment managers that has arisen in Israel over the past 15 years. The unequivocal lesson is that shares should not be sold in a hysterical response to security events.
Experience has taught investment managers that the local market quickly corrects itself once the security events end, and that they will then have trouble timing their reentry into the market, resulting in damage to their investment portfolio.
2. Private investors have also developed an impressive resistance over the years to major security events, and now, again, they are in no hurry to sell shares under pressure. This behavior includes the entire money management chain in Israel, which makes a decisive contribution to the stability of the TASE indices, despite the security situation.
3. Foreign investors are almost completely inactive on the local stock market, which eliminates another significant source of supply that could have been liable to sell large volumes of Israeli shares as a result of security developments.
4. In recent years, local investors have been weaned off their home court bias that made them concentrate most of their share holdings on the TASE. This is another pattern with whose problematic aspect we have been familiar: the drying up of trading volumes on the TASE. It can now be seen, however, that this pattern has also significantly reduced the local market's volatility, since the public's exposure to the TASE is limited, enabling it to respond less sharply to events of the kind we are currently experiencing.
5. Volatility on all global stock markets has collapsed in recent years as a result of the pursuit of returns in a zero interest rate world. The reduced volatility on the domestic market is part of a broad global phenomenon, which is also contributing to the relative stability we are now seeing. At the same time, despite the plunge in the fear factor in the developed markets, there is no doubt that security events of the type currently taking place in Israel would shake any other stock market in a developed market, so some of the credit here should go to the Israeli investors, who have grown an elephant's hide.
6. That fact that the economic trend on the world share markets is positive, and that the stock market is currently being recommended as an investment instrument by most investment houses, also supports stability on the TASE, despite the violent security events.
Regardless of the above, we will end on a small note of caution: obviously, no one can guarantee that this stable pattern will persist. It is certainly possible that it will turn out that the current security event has extensive economic significance that the market is currently underestimating.
The writer is chief strategist for the Ayalon Group.
Published by Globes [online], Israel business news - www.globes-online.com - on July 21, 2014
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