Tel Aviv Finance Stocks Drop 10% in Three Weeks Amid Investor Concerns
Translated & summarized from Calcalist by baba
Tel Aviv's financial stocks have dropped 10% in three weeks, signaling a shift after recent gains and nearing correction territory. This decline is attributed to rising US bond yields, reduced foreign investment in Israel, and growing political uncertainty ahead of elections. While some experts see the market pricing in negative scenarios, others argue that global tech and US market trends are the primary drivers. The sensitivity of insurance and investment firms to market fluctuations makes them particularly vulnerable to these factors.
The story in 6 lines · by baba
- Tel Aviv's TA Insurance and TA Finance indices each lost 10% in three weeks, nearing correction territory.
- Reduced foreign investment and rising political uncertainty are contributing to the downturn in Israeli stocks.
- Financial firms' profitability is highly sensitive to stock market performance, making them early indicators of sentiment.
- Global factors like rising US bond yields and potential US market corrections are impacting Tel Aviv.
- Some analysts believe the market is pricing in higher probabilities of negative future scenarios for Israel.
- Foreign investors' behavior is mixed, with some reducing activity while others focus on US market trends.
The Tel Aviv Stock Exchange has seen a significant downturn in financial stocks over the past three weeks, with the TA Insurance and TA Finance indices each losing 10%. This decline marks a reversal after months of gains and brings these sectors close to correction territory. The weakness extends beyond finance, with the TA 90 index showing sustained underperformance compared to leading indices, and many stocks trading far below their earlier highs. However, the drops are particularly pronounced in insurance and investment houses, which were major beneficiaries of the market rally over the last two years. These companies are considered highly sensitive to stock market movements, as their profitability is closely tied to asset management fees, investment portfolio performance, and fundraising success. When markets rise, their assets under management grow, leading to higher fees and potential performance bonuses. Conversely, market downturns erode asset values, potentially increasing redemptions and reducing profitability. Consequently, insurance and investment firms often react more intensely to market shifts than broader indices, acting as an early indicator of market sentiment.
The current downturn coincides with a less favorable environment for the Israeli market. Foreign net purchases of Israeli stocks have fallen by 70% year-to-date compared to last year, with foreign investors shifting from net buying to net selling in the banking sector. This weakening of a key demand source occurs amid rising political uncertainty. Despite the recent declines, insurance stocks were among the biggest gainers in the past two years, with the TA Finance index up 236% and the TA Insurance index soaring nearly 500% over the last three years.
Global factors are also contributing to the pressure. Rising US bond yields are increasing competition for investor capital, requiring higher expected returns from stocks to justify investment. This effect is particularly significant for companies and sectors that have experienced sharp increases and high valuations, such as those benefiting from the AI investment boom. A substantial correction in Wall Street could also impact the Tel Aviv market. Shimon Uliel of Altshuler Shaham stated that while there's no clear 'flight' of investors from Israel based on traditional indicators like dollar strength or CDS rates, the market is weak and likely pricing in a higher probability of negative scenarios. He emphasized that the sensitivity of insurance and investment firms to market developments is due to their direct dependence on capital markets.
Investment managers are currently cautious about public statements, especially regarding political matters. However, Roni Vermus, controlling owner of Israel's largest hedge fund, recently urged associates to work towards governmental change. A senior institutional investment manager cited rising bond yields, security uncertainty, and elections as key burdens on the stock market, noting that while the Israeli economy's fundamentals remain strong with continued consumption growth, investor fears focus on future scenarios. This manager believes that some risk is already priced into the market, with the TA 35 index down 10-11% and the TA 90 down about 22% from its peak. Nevertheless, financial stocks may remain highly sensitive. Uliel stressed that political stability following the upcoming elections, rather than the specific political outcome, is crucial for Israel's risk premium and international perception.
Dr. Elliot Hentov of State Street Investment Management, however, suggests that global investors view the Israeli stock market as closely linked to the US and technology sectors, and its performance is largely derivative of them. He noted that recent declines in Tel Aviv are not exceptional compared to the US market, where financial stocks have underperformed due to bond yield curve expectations. Hentov believes that for foreign investors, the Israeli elections are not a primary variable, as foreign policy is unlikely to change significantly.
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