Ten Threats to Your Finances in the Coming Year

As the year begins, ten key factors are poised to significantly impact personal finances, including savings, mortgages, and purchasing power. These include upcoming elections in Israel and the US, fluctuating oil prices, interest rate decisions, and the rapid advancement of artificial intelligence. While the future remains uncertain, market analysts are closely watching these developments, acknowledging that both risks and opportunities often accompany each factor. Even modest growth rates are now considered positive, with some anticipating a potential market bubble burst.

Elections in Israel on October 27 and in the US on November 3 are critical. The Israeli vote, with polls indicating a fragmented political landscape, could lead to prolonged coalition negotiations and a temporary budget, delaying reforms and new initiatives. This uncertainty, coupled with increased defense spending and rising cost of living, will be closely monitored by credit rating agencies. In the US, a divided Congress may stall budgetary decisions and reignite debates over the debt ceiling. However, election outcomes can also reduce uncertainty, potentially leading to a stronger shekel and lower borrowing costs if a stable government forms and conflicts conclude.

Geopolitical tensions, particularly concerning Iran, are driving oil prices above $100 per barrel, impacting global fuel, transportation, and food costs. US sanctions on banks facilitating transactions with Iran add another layer of complexity. For Israel, this translates to increased expenses in defense, insurance, and tourism. Conversely, a de-escalation of conflict could rapidly lower energy prices, reducing inflation and allowing central banks to cut interest rates. High global energy prices also benefit Israel's natural gas sector and related companies.

The Bank of Israel has lowered its interest rate to 3.25% amid a strong shekel and low inflation, while the European Central Bank and the US Federal Reserve face inflationary pressures. This divergence risks weakening the shekel if the US raises rates while Israel continues to lower them. For borrowers, lower rates reduce mortgage payments, offering positive real returns on savings. However, investors seeking higher yields may need to commit to longer-term deposits or bonds as rates on short-term savings decrease.

The bond market is experiencing rising yields globally, with US 10-year Treasury yields nearing 5%. This trend, driven by increased government debt and bond issuance, affects mortgage rates, corporate borrowing costs, and stock valuations. While higher yields offer a stable return for investors, they also increase financing costs for Israel. For pension funds, rising yields can decrease the current market value of bond holdings but improve future investment returns.

Artificial intelligence is driving massive debt-financed investments by tech giants like Alphabet, Amazon, and Microsoft, primarily for data centers and infrastructure. While demand is strong, revenue realization may be delayed, posing a risk to investors in global tech indices, which have a significant AI component. However, the sector's potential to boost productivity across the economy offers a long-term upside. A key constraint is electricity supply, making traditional energy companies attractive.

The non-bank lending market, valued at $2 trillion, is facing its first major test since 2008, with rising default rates. Issues include borrowers capitalizing interest, illiquid funds experiencing outflows, and interconnectedness with the traditional banking system. For Israeli institutional investors, this market offers higher yields but carries risks due to delayed asset valuations and potential liquidity mismatches.

China's economic growth, fueled by exports of semiconductors, vehicles, and ships, is exporting deflation, pressuring manufacturers globally. Control over rare earth metals and the situation around Taiwan also pose risks to supply chains. However, cheap Chinese goods help keep global inflation low, benefiting consumers and potentially influencing interest rate decisions. For Israel, this means cheaper imports but increased competition for local manufacturers.

Climate change is increasing insured losses from extreme weather events, leading to higher insurance premiums and reduced coverage globally. Israel faces additional costs due to security concerns. The transition to renewable energy presents investment opportunities in sectors like water, irrigation, and energy storage, reducing reliance on volatile oil prices.

Housing and mortgages remain a primary expense for Israeli families. While falling interest rates are reducing mortgage payments, imported inflation could halt further rate cuts. Labor shortages in construction are also slowing new projects and increasing housing costs. Refinancing existing mortgages at lower rates is a key strategy for homeowners. For renters, rising rents may follow increased demand for housing as rates decrease.

Finally, the "black swan" event, an unpredictable, high-impact occurrence like a cyberattack or a new health crisis, remains a significant risk. Diversification, a financial cushion, and avoiding excessive leverage are crucial preparations. Holding liquid assets during past crises allowed investors to capitalize on market downturns.