Israeli Stocks Double, Investors Seek New Opportunities Amid Shifting Global Markets

Israel's capital markets are at a turning point, with the domestic stock market having doubled in the past two years. This surge, coupled with declining interest rates and moderating inflation in Israel, contrasts with concerns in the U.S. about potentially rising or sustained high interest rates. The Israeli stock market's impressive performance has led to a reduction in its weighting within active portfolios, shifting focus to potentially more attractive international bond yields and a more selective approach to technology stocks.

Inflation in Israel has fallen to 1.5%, below the Bank of Israel's target, allowing for interest rate cuts. However, global inflationary pressures from energy and agricultural commodity price hikes, exacerbated by conflicts, may temper further rate reductions in Israel, suggesting a gradual approach. In the U.S., inflation remains a concern, prompting the Federal Reserve to consider maintaining or even increasing interest rates, a stark contrast to Israel's easing monetary policy.

U.S. Treasury bonds have become more appealing due to rising yields, driven by a significant government deficit and reduced foreign demand. These bonds offer attractive dollar-denominated yields of around 4.7% or more for longer terms, presenting a competitive alternative to equities, particularly for interest-rate sensitive sectors like real estate. While U.S. stocks have also seen gains, their performance over two years lags significantly behind Israel's.

The Israeli real estate market shows early signs of stabilization after a period of high interest rates, increased construction costs, and uncertainty. Falling prices, developer incentives, and the potential for improved security and political stability could support a recovery, though stock markets may have already priced in this rebound.

Within the technology sector, the focus is shifting from broad enthusiasm for artificial intelligence to a more discerning selection of companies. While chip-related stocks benefiting from AI investments remain strong, software companies integrating AI into their products are also emerging as growth areas. Investors are advised to diversify across geographies and asset classes, avoiding chasing past market leaders and instead focusing on long-term, balanced portfolios.