Bank and real estate stocks are interesting investments, supermarket chains less so, and one of them is even liable to collapse – these, and the view that the next wonder technology stock will be hard to spot, are some of the assessments and forecasts of senior managers of four of the largest investment houses on the Israeli capital market.
The four – Gilad Altshuler (joint CEO of Altshuler Shaham), Zvi Stepak (founder of Meitav), Dave Lubetzky (CEO of IBI Investment House), and Yair Lapidot (CEO of Yelin Lapidot) – met at a conference held by Four Seasons Financial Planning of the IBI group at the Tel Aviv Stock Exchange to present forecasts for 2024.
“Because of the many sources of risk in the local and global economies, chiefly geopolitical tensions and sharp macro-economic changes, identifying a sector or individual stock that will push the market forwards has become more challenging than usual,” said Four Seasons CEO and founder Moran Setton. “In our view, considerable weight should be allocated to broad indices, in Israel and overseas, within which the next ‘wonder stocks’ hide, those that could outperform even given these challenges and risks.”
After the Tel Aviv Stock Exchange underperformed last year, will it close the gap in 2024?
Unlike many on the market, the heads of the big investment houses do not expect a bonanza in the stock indices in Tel Aviv in 2024, because, they say, the stock exchange is weighted towards real estate and financial stocks, which did not perform exceptionally negatively in 2023, despite the shocks. They also say that risk in Israel has grown because of the war, and the stock market itself suffers from severe liquidity problems, which make it harder to invest in it.
Stepak: “Thanks to rising prices in November-December, our stock market closed 2023 with a positive return of about 4% in the leading indices, much less than in the Wall Street indices, the DAX, the Nikkei, and most of the leading stock indices worldwide.
“The lag began even beforehand, in October 2022. I don’t think that Tel Aviv will make up the lag this year. Stocks in Israel are priced cheaply on the whole, but not at bargain levels. There’s no crazy undervaluation here that could make it possible to rake in fast gains.
“Even if we assume that everything will come right as far as the war is concerned, it’s impossible to compare our market with those of Germany or the US. There’s a bigger opportunity here, but also much greater risk.
Furthermore, investing in bonds is something to consider globally and in Israel at present. Five years ago, there was nothing to compete with stocks; today, bonds have taken center stage.”
Has the Tel Aviv Stock Exchange lost attractiveness internationally?
Altshuler: “The Israeli market hasn’t lost attractiveness – it’s where it belongs. We’re tiny in relation to the world, less than 0.4% of the MSCI World Index. The fact that the Israeli public invests between 20% and 25% in stocks in Israel is a lot, and it happens because of home bias. We have a small stock market that consists mainly of income producing real estate, banks, gas, a little insurance. As for hi-tech, it is lacking.
“People always say ‘the market in Israel does less well than foreign markets.’ The market in Israel does less well because we don’t have the ‘magnificent seven’ here (the seven technology giants whose stocks lead the indices on Wall Street, H. S.).
“If the old Mellanox had started to be traded here (again), the market would have done twice as well. The place of the local market in investment portfolios and pensions will steadily shrink,” Altshuler predicts. “If I hold $1 billion in Microsoft shares, and I call and give an order to sell, I sell without affecting the market.
“Can you do anything like that here? It’s nice to see a holding of NIS 3-5 billion in a company, but there’s no possibility of realizing it immediately. Let’s say, hypothetically, that I knew October 7 was going to happen here, and I wanted to sell everything – I can’t. There is a place for the Israeli market, but not above 20% in the investment portfolio.”
Lapidot: “I saw an ad recently financed by the Tel Aviv Stock Exchange calling on Gil Shwed to ‘come home’, that is, proposing that Check Point should be listed here as a dual-listed stock. The problem is that the Israeli technology sector is in America.
“Almost all the companies skip to Nasdaq and refuse even to be dually listed. At the beginning of the judicial overhaul process, the CEO of Nice even hinted that he was considering delisting from the Tel Aviv Stock Exchange, and continuing to be traded only in the US.
“Had Nice left, that would have been the end of the hi-tech portfolio listed for trading here. We at Yelin Lapidot decided not to manage pensions; it’s a monster that’s too big for the Israeli stock market. The pension funds have no option but to go abroad. If you haven’t got huge volumes, you’re more flexible than someone who’s a monster with hundreds of billions of shekels. I don’t think that this is the time to increase positions in the Israeli stock market, because Israel’s fiscal hole is deeper than Hamas’s tunnels. You therefore have to be very cautious about returning to the stock market here.
“In Israel – banks; overseas – technology and drugs.”
Which sectors are interesting and which are risky in 2024?
Stepak: “I’m a great devotee of bank stocks in Israel. Today, they’re priced at a multiple of 0.8 on shareholders’ equity. So as far as the big banks like Leumi and Hapoalim are concerned, it’s a questions of mathematics – if these banks can make a 10% return on equity, and you buy them at 80% of equity, you can expect an annual return of 12.5%. If you look at it as a ten-year savings plan, a million shekels will become NIS 3 million. The alternatives are to invest in the bonds of the banks themselves, and to receive NIS 1.5 million for every NIS 1 million that I buy, or Israel government bonds, that will give even less.
“It’s true that bank stocks versus the government of Israel are a different level of risk, but we have seen that the banks are capable of making profits and becoming more efficient. In some recent periods the banks made 15-20% on equity, so they are certainly relevant,” says Stepak.
“The insurance companies also look reasonably priced. Another sector is income producing real estate, with an emphasis on shopping malls, on the assumption that interest rates here will indeed fall. The local telecommunications sector could also be a candidate for investment, because competition within the sector has declined.”
Overseas, Stepak recommends technology and pharmaceuticals stocks of mid-size companies. “Technology is still interesting: AI, semiconductors, and so on. There are risks if the conflict between China and Taiwan worsens, that’s a mega-event for semiconductors. So everything is on the assumption that there’s no explosion of geopolitical risk,” he says. “The pharmaceuticals sector in the US is interesting. Companies like Pfizer, Israel’s Teva, which has emerged from the mess it got into. Second tier stocks in the US (the Russell 2000 Index) are also interesting, chiefly companies that sell locally.”
What’s dangerous for investment?
Stepak: “The local supermarket chains. They gained a little from over consumption by the public when the war broke out, but that was a onetime thing. The competition between them will very much increase in the coming years. It could even be that one of the chains will collapse and merge with one of the others. A large surplus of commercial space has been created.
“Another sector that I would be wary of is local hotels stocks. These are businesses that are liable to suffer from the continued consequences of the war.”
The stocks of the “magnificent seven” (Apple, Google, Microsoft, Amazon, Tesla, Ndivia, and Meta) were the engine of the rises on Wall Street in the past year. Are these stocks still interesting?
Lapidot: “I call them ‘the seven monsters’ because most of them have become monopolies in their fields. A great deal of antagonism has risen towards them, and regulators are on their case everywhere. It’s possible to invest in the S&P Index avoiding their extra weight (they represent about a quarter of the index, H.S.) via the S&P 500 Equal Weight Index (in which each is about 0.2% of the index). Exposure to them should absolutely not be increased, because I don’t believe that these monsters will be allowed to grow further.”
Lubetzky also believes that the technology sector is very generously priced at present. “In my opinion, technology stocks are pricing the best possible scenario. We are still at a high level of interest rates, which, in the end, is mainly good for the banks.”
Last year, investing in the S&P 500 was all the rage. Would you recommend investing in it now?
Altshuler: “Yes, it’s worth being exposed to indices on Wall Street. In the next twenty years, technology will lead the world, and the next giant companies will clearly be from this sector. We don’t know what the new ones will be. The stock index will find them, we won’t, and we have to acknowledge that. Looking back over the last few decades, we didn’t know how to spot the ones that would succeed: Amazon, Tesla, Nvidia. It could be that in the future there will be a magnificent 15, or just four, so you have to be in the index.”
Almost-free mortgages aren’t coming back
The panelists don’t see the Bank of Israel’s interest rate cut of last week changing conditions on the local market drastically. “In the past few months, we thought that the interest rate ought to fall, but we’re unanimous that it won’t fall to what it was. That is to say, from 4.5% we won’t go down to zero,” says Altshuler. “So there isn’t such a big drama here. This step gives some relief, but it won’t lead to a period of almost-free mortgages, we’re not going back there. It’s a positive signal that will help the economy, and we’ll take it slowly.”
Lubetzky: “A zero interest rate is not a healthy situation for the markets. It causes a wrong allocation of capital. Thus, we witnessed bubbles in hi-tech stocks and digital currencies. Current interest rate levels make it possible to obtain a return from buying and holding bonds. In the third quarter of 2023, the public’s investment portfolios were already better balanced between the different sorts of investment.
“In the US, the effect of the interest rate hikes began to be felt only from the fourth quarter of 2023. Only during that quarter did companies start to feel a growing credit squeeze. But stock market investors have already started celebrating in the expectation of interest rate cuts, and that’s a situation that could be dangerous, and even lead to an unpleasant outbreak of inflation.”
To sum up, what’s your forecast for the global economy in 2024?
Lapidot: “None of us knows what will happen in another minute. It’s all a matter of probabilities for scenarios and your estimate for each of them. In the Middle East, a situation has come about that is broader than Israel versus Hamas. There’s also the China versus the US story. The Chinese are now more militant and aggressive in their stance towards Taiwan, and we have already seen what the Russia-Ukraine war has done to Western Europe. So we are far from the vision of the end of days where ‘the lion shall lay down with the lamb.’”
Altshuler expects a year in which there won’t be an economic boom, but nor will there be a slide. “It will be a year in which we emerge a little from the shock of the interest rate hikes. We are headed to a more comfortable place that will contribute to the economy. Let’s hope that there won’t be additional surprises like the war in Ukraine or October 7. If there aren’t, then on the whole the world will move forwards.”
Lubetzky: “In the end, the performance of the markets is a function of the level of interest rates, plus surprises. Interest rates are on the way down. Will the surprises be positive or negative? It’s impossible to work in our profession without being optimistic. Eventually, the market’s expectation is positive.”
Stepak: “I take a soberly realistic view, without wishful thinking. It’s going to be a tough year for the Israeli economy, even if the interest rate falls, which will bring relief for real estate and so on. And it’s not just one year, but a situation that could last several years, because the defense budget will need an extra NIS 20 billion a year.
The US elections will play a big part. If Trump wins, God preserve us, it will be bad for Western democracy, for the NATO alliance, and for the war between Russia and Ukraine. It will ultimately affect our economy as well.”(Globes/TNS)