Israeli Stock Market Paradox: Indices Rise While Most Stocks Fall
Translated & summarized from Globes by baba
The Tel Aviv 35 and Tel Aviv 125 stock indices have risen significantly this year, but most individual stocks within them have declined. This paradox is attributed to a few large-cap companies, particularly in the tech sector, driving index performance while the broader market weakens. Analysts debate whether this is a natural market selectivity or a sign of underlying fragility, with some suggesting that passive index investing remains a sound strategy for average investors.
The story in 5 lines · by baba
- Israeli stock indices Tel Aviv 35 and 125 have risen 16.3% and 10.9% respectively this year.
- Despite index gains, 70 of 125 companies in the Tel Aviv 125 index show negative returns.
- The strength of leading indices is driven by a few heavy-weight stocks, masking broader market weakness.
- Smaller companies in the Tel Aviv 90 index have seen significant declines, down 6.5% year-to-date.
- Analysts debate whether the market's selectivity is natural or a sign of a 'hidden bear market'.
Despite the Tel Aviv 35 and Tel Aviv 125 indices showing gains of 16.3% and 10.9% respectively since the start of the year, a significant number of investors are experiencing losses. Data from the stock exchange reveals that 70 out of the 125 companies in the Tel Aviv 125 index have negative returns year-to-date. This trend is particularly pronounced in smaller companies within the Tel Aviv 90 index, which has fallen by 6.5% this year, including an 11% drop in the last month alone.
Investment manager Lior Vider explains this discrepancy by noting that the strength of the leading indices is often driven by a few heavy-weight stocks, particularly in the chip sector like Tower and Camtek, which have seen sharp increases. These gains mask a broader weakness, with Vider observing that nearly twice as many stocks have declined (around 340) as have risen (around 190). Furthermore, about 10% of all stocks are trading near their annual lows, significantly down from their peaks.
Yaniv Pagot, head of the trading department, views this selectivity as natural, suggesting it reflects companies' differing responses to the current macroeconomic environment. He points out that sectors like real estate and construction are less favored, though even within sectors, performance varies, citing Mego Or's pivot to data centers as an example of a company thriving despite broader sector challenges.
Economist Anatoly Zayman, however, likens the situation to an "illusion of broad growth," where a small number of large companies are propping up the indices while most others stagnate or decline. He notes that sectors like banking, insurance, and technology, which are less sensitive to interest rate hikes, are well-represented in the Tel Aviv 35 index, contributing to its rise, unlike the Tel Aviv 90 index which includes interest-rate-sensitive sectors like real estate and renewable energy.
Vider argues that this narrow market breadth is a clear sign of weakness, creating a "hidden bear market" where the indices present a false picture of the overall market sentiment. He likens the situation to Wall Street, where a few large tech and AI companies dominate the S&P 500, but emphasizes that Israel's market is less liquid, exacerbating the downward pressure on smaller stocks when capital flows only to a few large players.
Pagot counters that passive investment in indices like the Tel Aviv 125 is still a wise strategy for most individuals, as the index itself reflects the market's composition and helps avoid individual stock-picking errors. He highlights that despite 70 companies being in the red, the index is positive, suggesting that the "foolish" investor who bought the index is actually the smart one.
