Mizrahi Tefahot CIO Predicts Continued Shekel Strength and 3-4% Israeli Economic Growth

The past month in Israel's capital markets highlighted significant volatility, with leading Tel Aviv indices dropping about 10% in June, erasing gains made since the February launch of Operation "Roaring Lion," according to Shay Danino, Chief Investment Officer at Etgar Investment Management, part of Mizrahi Tefahot Bank. Danino attributes the market setback partly to investor disappointment over the US President Trump's agreement with Iran. However, he notes that the market had previously surged 130% since the September 2024 "Beeper Operation" against Hezbollah, making profit-taking natural.

Danino, who began his career as an options trader in 2004 and joined Etgar in 2011 before becoming CIO in 2015, remains confident in Israel's market outlook. He expects the Israeli economy to sustain growth rates between 3% and 4%, which will support positive returns in the local stock market. He also foresees the shekel strengthening again against the dollar, moving closer to a 2 shekel per dollar exchange rate, driven by Israel's trade surplus and robust economic activity.

On the global macroeconomic front, Danino expresses mixed views. While he sees strong growth in companies benefiting from artificial intelligence (AI) investments, he warns of challenges such as high US government debt, persistent inflation, and delayed Federal Reserve interest rate hikes. He predicts the Fed will need to raise rates significantly if it does not act in July. Danino highlights the AI sector as entering a powerful investment cycle expected to last until 2030, but cautions that demand risks and potential price reductions could affect this optimistic outlook.

Danino also warns about market concentration risks, noting that most of the S&P 500's gains this year come from just three companies (Micron, Intel, AMD), and similarly in Asian emerging markets from Samsung, SK Hynix, and TSMC. He advises investors to remain invested rather than attempt market timing.

For portfolio construction, Danino recommends conservative investors allocate 6% to Israeli equities and 9% to foreign stocks, with a mix of government and corporate bonds. Aggressive investors might allocate 25% to Israeli stocks and 35% abroad. Sector-wise, he favors financials and banks in both Israel and the US, infrastructure in Israel due to Middle East developments, and technology for its AI growth potential. He advises caution on US healthcare and communication services sectors, considering valuation and momentum factors. In Israel, he views insurance stocks as somewhat expensive despite recent corrections.

Danino's insights reflect a cautious but optimistic stance on Israel's economic and market prospects amid global uncertainties and technological shifts.