Israeli Investors’ Maneuvering Growing Increasingly Dangerous

Moody’s credit agency has downgraded Israel’s credit rating from A1 to A2 for the first time in history, with further downgrades expected. Despite this unprecedented move, Israel’s investors and the Tel Aviv Stock Exchange were largely unmoved by the news. The key index, Tel Aviv 35, which hosts the country’s largest companies, only saw a decrease of about 0.6%. Aside from the banking index which fell by 1.7%, other economic indicators showed only minor declines.

Economists had anticipated this downgrade, with the negative forecast also contributing to the market’s response. Tamir Shapira, CEO of Ilam Mutual Funds, explains that this was expected and had been factored into the markets since the war outbreak.

Wall Street Breaks Record Again

While Israel’s credit rating was being downgraded, Wall Street was making history with the S&P 500 index breaking its all-time record and closing at over 5,000 index points. This is the second time in a month that the index has reached a new high. However, Alex Zabrzynski, chief economist of the investment house Meitav, warns that global stock market behavior indicates overheating, as evidenced by surveys of institutional and private investors who report very high optimism.

It seems that risks are escalating on both sides. In Israel, the rating increase will lead to higher debt costs for all companies in the economy, impacting households as well. In the US, the continued surge on Wall Street increases the likelihood of an impending downgrade. This leaves Israeli investors with a dilemma as their two main markets face turbulence.

Investing in Israel vs. the USA

The Israeli stock market has yielded significantly lower returns than its American counterpart in the past year. Since the end of October 2023, the S&P 500 has increased by about 22%, while the Tel Aviv 35 has increased by about 13%. Bernard Menor, investment manager at IBI Portfolio Management, believes that the American market is still more favorable than the Israeli one due to the greater economic stability in the US and the geopolitical risk in Israel.

Some, however, see the short-term instability in Tel Aviv as an opportunity. Shapira Mailim, for instance, predicts increased volatility in the domestic market in Israel and recommends investing in banks, the infrastructure sector, real estate stocks, and defense companies. However, he advises caution with non-bank credit sector and office real estate companies.

Opportunity in the Local Debt Market

The debt market is likely to be the most immediately impacted by the rating decision. Economists predict that yields on short-term government bonds will rise, making the local bond market more attractive. Moody Shafferer, the chief strategist for financial markets at Bank Hapoalim, recommends focusing on short-term Israeli government bonds.

Roi Keren, Bank Leumi’s regional investment advisor, anticipates that corporate bonds in Israel may fall due to the downgrade. He advises investors to prepare for a potential extreme event and refrain from making abrupt and significant changes in their portfolios.