The sharp falls on the Tel Aviv Stock Exchange since the start of the war in the south will cause only a small negative return on the public’s long-term savings in October. Following the negative returns in September recorded by the provident and pension funds, however, the positive returns in the year to September will continue to be eroded for a second successive month.
After a 10% drop in the Tel Aviv 125 Index since October 7, Erez Migdali, chief investment officer of Migdal Group, says, "The sharp declines will shave 1% off the returns on the public’s savings, so for the time being the harm is not very significant." In the period January to September, the general investment tracks of the provident funds posted a rise of 6%, and for the equities tracks the rise was 9%.
The relatively small damage to savings stems mainly from the diversification of the funds’ investments overseas and their high exposure to foreign currency, chiefly the US dollar, against which the shekel has weakened considerably since the outbreak of the war. The more the public invests its money overseas, the more calls are heard, particularly from the Tel Aviv Stock Exchange, for restrictions on the movement of capital outside Israel, but when the local stock exchange’s underperformance relative to overseas stock markets deepens, the diversification of investments proves itself.
This diversification could even restore investment in Israel and generate a high return for savers later on, since many foreign investors have sold holdings on the Tel Aviv Stock Exchange in the past couple of weeks because of the instability in the security situation, and the buyers have chiefly been Israeli financial institutions with greater stamina.
Half Migdal’s portfolio diversified overseas
Because of the war, the Capital Markets, Insurance and Savings Authority has allowed the financial institutions to postpone the filing of their September reports on pension and provident fund returns from October 15 to October 23. Preliminary results of the three institutions that have published figures for September - Migdal, Meitav, and The Phoenix - show an average return on pension funds held by those aged up to 50 of minus 0.9%, with The Phoenix coming out on top with a return of minus 0.8%. The initial indications are that among the major pension and insurance companies, The Phoenix leads for returns for the year to date on several of the main savings products.
As mentioned, the factor that has mitigated the falls on the Tel Aviv Stock Exchange in the past few months has been the weakening of the shekel against the US dollar, by some 7% (of which 5% is since the outbreak of war), with the rate crossing the symbolic NIS 4/$ level.
Migdali explains that Migdal’s investment portfolios are highly diversified geographically, with some 55% invested overseas, and have a high foreign currency exposure in comparison with the past few years, amounting to 25% of the portfolios. "The increase in this exposure has been taking place since the beginning of the year, because of the rise in Israel’s risk profile, among other things as a result of the government’s judicial overhaul legislation," Migdali said.
"In the current crisis, we are monitoring our holdings and analyzing events. In some areas, for an institution that looks to the long term and has pension savings, the situation could create attractive points of entry, including in the stock market in Israel. This is not of course in a wholesale way, but on the basis of individual analysis of certain companies that we carry out."
Migdali says that effective action by the government in Israel could revive some sectors. "It will take time, but it is correct to act gradually and increase exposure to equities," he says.
Which sectors for example?
"The depreciation of the shekel helps exporting companies. In addition, we have raised our exposure to the banks (the Tel Aviv Banks5 Index has fallen 17% since the outbreak of war, R. W.) and to other local sectors that have been repriced in the past two weeks. For example, stocks of some Israel real estate companies have fallen very sharply, and opportunities have been created in companies in both residential and commercial real estate that have reached levels that make them much more worth buying."
Nevertheless, Migdali says that Migdal does not consider the whole market to be equally attractive, and is investing in companies that it has known for many years, with good management, a good product, and a low price. "The Israeli market has been hit by the situation, but it had greatly underperformed in the first place since the beginning of the year," he says. "In this respect, if we deal with ‘the day after’ and with forming a more growth-orientated economic policy, we could see the stock market emerging from the crisis."
Published by Globes, Israel business news - en.globes.co.il - on October 23, 2023.
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