The political disarray culminating in the prime minister's decision to call an early election for the Knesset brought in train price falls for shekel denominated government bonds this week.
Even so, and as with the falls in corporate bonds that rocked the market last week, it seems that portfolio managers are not anxious. "Looking ahead, as long as the interest rate remains low, the fiscal situation is fairly stable. Therefore, even without a functioning government, the negative trend in unlinked bonds is not expected to be long lasting," says Meitav Dash chief economist Alex Zabezhinsky.
According to Zabezhinsky, recent events look like a degree of correction to the underpricing of risk that prevailed beforehand. "Any event was liable to cause a shock. As it happened, it was the announcement of elections and the sharp drop in the value of the shekel that followed," he explains.
"The Israeli bond market has seen fairly sharp drops in yields in comparison with other markets, and, as a result, yields in Israel, particularly on long-term bonds, fell to too low a level. This level does not adequately reflect the economic, political and regional risks of the State of Israel," Zabezhinsky says.
Ronen Matmon, chief investment manager at Excellence Nessuah Provident Funds, also tries to sound reassuring. "There's no cause for alarm," he says, "The falls on the bond market stem from a recalculation of risk. The trigger is the early election, while we are also seeing an exit of foreign investors because of fears of the way the depreciation of the shekel will affect inflation and growth, and because of the fact that economic reforms will be stuck during the election period."
As for corporate bonds, Roni Pilo, assistant general manager at Amban-IBI Investment Management points out that the political uncertainty has worsened the trend of weakness that began several months ago. "The many offerings coming to the market also contribute to the weakness by increasing supply," he says.
Following the break-up of the government, the shekel-dollar exchange rate continued to rise, climbing to NIS 3.99/$. "It appears that market players believe that after the election a more right-wing government than the current one will be formed in Israel, and they fear that Israel will become isolated," says Jacob Nimkovsky, CEO of Alumot-Sprint Mutual Funds Management.
The fear, Nimkovsky says, is that foreign investors will exit Israel because of the uncertainty. He therefore sees the shekel-dollar rate continuing to rise until the elections, and high volatility on the capital market. Prico Group also believes that the shekel-dollar rate will continue to rise, and that it will cross the NIS 4/$ mark. "The main risk remains a change in the global market trend, particularly in the US," Prico adds, "The rush to the dollar by investment institutions is understandable, but it presents the Bank of Israel with a huge challenge. If there is a change in trend, who will buy the billions of dollars it has bought since last August? In the pre-election period, the Bank of Israel will have limited freedom of action, and that is a state of affairs that puts at risk mutual fund and provident fund members, as well as Israeli industry and the economy as a whole."
Published by Globes [online], Israel business news - www.globes-online.com - on December 4, 2014
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