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Israeli investors are engaging in riskier maneuvers


Feb 12, 2024

On Friday night, Moody’s issued a dramatic announcement that Israel’s credit rating has dropped for the first time ever, from A1 to A2, with further downgrades expected. Despite the significance of this move, investors in the Tel Aviv Stock Exchange were not significantly impacted. The local flagship index, Tel Aviv 35, which trades the largest companies in Israel, only saw about a 0.6% decrease. With the exception of the banking index, which fell by 1.7%, Israel’s economic indicators were characterized by slight declines. Although there is a negative trend, it is not considered catastrophic.

Senior economists expected a reduction, but the negative forecast had an impact given the current conditions of war in the region. At the same time as the announcement in Israel, history was made on Wall Street with the S&P 500 index breaking the all-time record and closing at more than 5,000 index points. This, combined with high investor optimism, has led to an increase in global stock market risk.

Investors are faced with increased risk in both Israel and the US. The American market has performed better than the Israeli market in the past year, with higher returns. However, the geopolitical risk in Israel is much higher and the economic environment weaker. The government deficit is expected to grow in the short term due to war expenditures, but investors with a longer horizon may find opportunities in the local market.

Despite the downgrade, there may be investment opportunities in the local market. Recommendations include investment in banks and infrastructure, while being cautious of the non-bank credit sector and office real estate companies. The debt market is expected to be affected quickly by the rating decision, with yields on short-term government bonds expected to rise. Despite the increased risk, the local capital market may not fully price the downgrade, contributing to an increase in lateral returns.

Interest rate cuts in Israel may be postponed or not occur, leading to potential negative effects on the real estate market and private consumption. The recommendation is to focus on investments in shorter-term Israeli government bonds, as well as buying these bonds abroad. Corporate bonds in Israel may fall due to the downgrade, and companies with high leverage and low coverage ratios may be negatively affected.

There are potential opportunities for investors in the local market, but it is crucial to navigate the increased risk and volatility that comes with the credit rating downgrade.

By Editor

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