Investment Manager Urges Realistic Expectations for Stock Market Gains
Yair Shani, co-CEO of Sigma-Clarity Investments, has revised his outlook on the stock market, advising investors to temper their expectations for high returns. Previously, in December 2023, Shani recommended investing in the Tel Aviv Stock Exchange, which subsequently saw significant gains, with the TA-35 index rising over 120%. In April 2024, he advised increasing exposure to the US market during a period of global market downturns, another recommendation that proved accurate. However, in his latest assessment, Shani is more cautious, stating that the era of achieving tens of percent in annual stock market profits is likely over.
Shani believes that current market valuations are significantly higher, and while a 9%-10% annual return might be achievable, investors should anticipate potentially lower yields. The Israeli market, for instance, has seen modest gains of 1% in the TA-35 index over the last six months, following earlier surges. He attributes some of this local market uncertainty to the upcoming elections in October, as investors anticipate potential policy shifts. Despite this, Shani notes that the market has undergone a price correction after some sectors experienced excessive growth, and he views the long-term prospects for the Israeli economy and its companies positively.
In the US, Shani identifies a dichotomy of high interest rates, with 10-year Treasury yields nearing 5%, contrasted with a robust economy fueled by AI investments. He considers US market valuations to be largely justified, though not cheap. A significant concern for him is the escalating US national debt, which has reached $40 trillion. Geopolitical tensions, such as those involving the Houthis or former President Trump's actions, are having less impact on markets as investors become accustomed to them.
Shani highlights Artificial Intelligence (AI) as a crucial investment engine, despite uncertainties about specific business models and potential overvaluation in some companies. He recommends diversifying AI exposure through ETFs across sectors like energy, infrastructure, and healthcare, noting the dramatic and ongoing AI revolution. He also sees potential in nuclear energy, industrial commodities, and defense sectors, particularly in Europe, which is re-evaluating its military capabilities. For younger investors, he reiterates the advice to invest heavily in stocks, diversified across domestic and international markets.
Shani has constructed two investment portfolios, one conservative and one aggressive, both maintaining an equal split between Israeli and US assets. The conservative portfolio allocates 10% to Israeli stocks and 10% to US stocks, with the remainder in Israeli bonds (40% government, 40% corporate). The aggressive portfolio dedicates 40% to Israeli stocks and 40% to US stocks, with 10% in Israeli government bonds and 10% in corporate bonds. He favors US markets for international equity investments due to the presence of leading global companies. His preference for Israeli bonds stems from concerns about currency fluctuations impacting foreign bond returns, though he suggests adding US corporate bonds issued in Israel due to attractive spreads. Recommended Israeli sectors include energy, banking, insurance, and infrastructure, while US-focused ETFs cover infrastructure, commodities, technology, pharmaceuticals, and energy.