Israeli Stock Market Diverges: Blue Chips Rise While Smaller Stocks Lag

As the Israeli stock market navigates the latter part of the year, a significant divergence has emerged between its leading indices. While the Tel Aviv 35 and Tel Aviv 125 indices have shown robust gains of 16.8% and 11.9% respectively year-to-date, the smaller-cap Tel Aviv 90 index has fallen by 3.6%. This performance contrasts sharply with the previous year, where the Tel Aviv 90 index saw a substantial 46.6% increase.

The disparity is largely attributed to the concentrated nature of gains in the larger indices. For instance, just five stocks, including Tower Semiconductor, Phoenix, Teva, Elbit Systems, and Harel, are estimated to account for nearly 10% of the Tel Aviv 35's overall rise. Tower Semiconductor, in particular, has surged over 80%, driven by the global AI chip boom.

Conversely, the Tel Aviv 90 index is weighed down by significant drops in several constituent companies. Major decliners include Energian and Amot Investments, down nearly 20%, Equital, which lost a third of its value, Electra Real Estate, down over 60%, and Gilat, which fell 26.4%. This broad weakness in smaller stocks has pushed the index into negative territory.

This divergence raises questions for investors about potential opportunities. Some analysts suggest that the underperformance of the Tel Aviv 90 index may present undervalued stocks, especially if the reasons for their decline are not fundamental business issues. However, others advise caution, noting that the momentum driving the Tel Aviv 35, particularly in sectors like insurance and technology, may continue to favor larger-cap stocks.

Investment managers offer differing perspectives. Lior Wax, CEO of Infinity Investment Management, recommends focusing on the leading indices, citing the strength of banks and insurance companies, which benefit from the Israeli economy and capital market growth. He notes that a recovery in sectors like real estate, which has a significant weighting in the Tel Aviv 90, is needed for that index to rise. Eyal Shina, Deputy CEO of Pasternak Shoham Investment House, sees potential in the Tel Aviv 90, highlighting that sectors like real estate and renewable energy, which are sensitive to interest rates, have been hit hard by the current environment. He believes the significant price gap between the indices makes some Tel Aviv 90 stocks attractive, and a positive election outcome could further boost the index.