Ten Factors Shaping Your Finances in the Coming Year

The coming year presents a complex economic landscape influenced by ten key factors, each with potential positive and negative implications for personal finances. These include upcoming elections in Israel and the United States, the ongoing impact of the war on oil prices, rising bond yields, significant investments in artificial intelligence funded by debt, a struggling non-bank credit market, and deflationary pressures from China.

Elections in Israel on October 27 and U.S. midterm elections on November 3 are critical. Israel's political uncertainty, with no clear majority in polls, could lead to prolonged coalition negotiations, delaying budget approvals and reforms, while potentially impacting its credit rating. In the U.S., a divided Congress may stall fiscal decisions. However, election outcomes can also reduce risk premiums, strengthen the shekel, and lower borrowing costs if they lead to stable governments and an end to conflicts.

The war has pushed oil prices above $108 per barrel, impacting transportation, food, and electricity costs, and complicating central bank decisions on interest rates. For Israel, this adds security and maritime insurance premiums, and affects tourism. Conversely, a cessation of hostilities could rapidly decrease energy prices, easing inflation and allowing for interest rate cuts. High energy prices also benefit Israel's natural gas sector.

Interest rate policies diverge globally. The Bank of Israel has lowered its rate to 3.25% due to a strong shekel and low inflation, while European and U.S. central banks face higher inflation. This divergence risks weakening the shekel and reintroducing imported inflation. While lower rates benefit borrowers through reduced mortgage payments, they decrease returns on savings. Savers seeking to maintain yields may need to lock them into longer-term investments.

Global bond yields are nearing 5%, driven by increased government debt issuance, particularly in the U.S. This benchmark rate influences mortgage rates, corporate borrowing costs, and stock valuations. While high yields offer a rare opportunity for low-risk, positive real returns on government bonds, they also increase Israel's borrowing costs and impact pension fund valuations.

Massive investments in AI, funded by corporate debt, are underway by tech giants like Alphabet, Amazon, and Microsoft. While demand for AI services is strong, the realization of revenue is projected over several years, posing a risk to Israeli pension funds heavily invested in global tech indices. Infrastructure, particularly electricity supply for data centers, is a key bottleneck.

The non-bank credit market, valued at $2 trillion, is facing increased default rates, exceeding historical averages. This sector's interconnectedness with global banks poses a systemic risk. While offering higher yields, these investments carry risks related to liquidity and valuation transparency, which can affect institutional investors and, consequently, Israeli savers.

China's economic growth, driven by exports, is exporting deflationary pressures globally, impacting manufacturers worldwide and potentially leading to trade restrictions. However, these low-cost goods also help curb inflation in Western economies, supporting lower interest rates. For Israel, this means cheaper imports but increased competition for local producers.

Extreme weather events are increasing insurance claims globally, leading to higher premiums and reduced coverage for consumers. In Israel, security concerns further increase insurance costs. The transition to renewable energy presents opportunities for Israeli companies, but requires significant infrastructure investment.

Housing and mortgage costs remain a primary concern for Israeli families. While falling interest rates offer some relief, potential renewed inflation from high energy prices could halt rate cuts. Government budget delays and labor shortages in construction are also impacting housing prices. Refinancing mortgages taken at peak rates could offer significant savings.

Finally, the unpredictable "black swan" event, such as a major cyberattack or sovereign debt crisis, remains a significant risk. While unknowable, preparation through emergency funds, diversification, and avoiding excessive leverage can mitigate potential impacts.