Tel Aviv Stock Exchange Sees Sharp June Drop After Strong Start to 2024

June 2024 marked one of the weakest months for the Tel Aviv Stock Exchange (TASE) in recent years, with leading indices falling up to 11%, pushing them into correction territory for the first time since late 2023. This decline followed a prolonged period of strong performance and was influenced by the nearing resolution of the US-Iran conflict. Despite the sharp monthly drop, TASE still posted positive returns for the first half of the year, with the TA-35 and TA-125 indices gaining 12% and 10% respectively, comparable to the US S&P 500's 8% but below the tech-heavy Nasdaq's 18%.

Investment managers attribute the June downturn to fading expectations of regime change in Iran and potential peace with Saudi Arabia, contrasting with global markets that rebounded due to the US-Iran agreement. Sector performance diverged significantly: IT and communications stocks dropped about 18% amid AI-related concerns, oil and gas fell 12%, and banks declined 6% year-to-date. Conversely, energy stocks surged nearly 40%, driven by anticipated electricity demand for AI-supporting data centers, alongside infrastructure and technology sectors, especially chipmakers.

Top performers included real estate company Mega Or, which is pioneering data center development with a 122% gain, infrastructure investment funds Keystone and Generation (113% and 105%), renewable energy firm Doral (101%), and chipmaker Tower Semiconductor (over 101%). On the downside, IT and software companies like Matrix, Formula Systems, and One Technologies fell sharply, as did Ariet Industries, a former investor favorite, down nearly 40% amid reduced regional tensions.

Looking ahead, experts are divided on whether TASE can sustain its outperformance. Some foresee a normalization of returns aligning more closely with global markets, while others highlight Israel's unique advantage due to its monetary policy direction and potential interest rate cuts, which could benefit real estate and banks. However, geopolitical clarity remains crucial for investor confidence. Preferred sectors for the coming year include banks and defense industries, while caution is advised for chip stocks due to high valuations and residential real estate given inventory challenges.

Overall, the market's recent volatility reflects a shift from broad-based rallies to more selective investment strategies, with investors increasingly differentiating between sectors amid evolving geopolitical and economic conditions.