Israeli Stocks Struggle Amid Political Uncertainty and High Valuations
Translated & summarized from Globes by baba
The Tel Aviv Stock Exchange is experiencing declines due to political uncertainty in Israel and high stock valuations, contrasting with Wall Street's gains after US midterm elections. Analysts cite extreme local investor exposure and a lack of strong domestic economic growth as key factors. Concerns also include potential shifts in US policy towards Israel and the possibility of delayed interest rate cuts by the Bank of Israel amid the prevailing uncertainty.
The story in 5 lines · by baba
- Israeli stocks are falling due to political uncertainty and high valuations, unlike Wall Street's rise.
- Local investors have reached record high exposure to Israeli stocks, making the market vulnerable.
- The Israeli market is considered expensive relative to global peers and its own history.
- Shifts in US policy and potential reduction in aid add to investor concerns.
- Analysts predict the Bank of Israel may delay interest rate cuts due to the uncertainty.
While Wall Street surged following the US midterm election results, the Tel Aviv Stock Exchange (TASE) continued its downward trend, primarily due to political uncertainty in Israel. Analysts attribute the TASE's weakness not only to domestic political instability but also to a highly exposed local investor base and elevated stock valuations.
Alex Zabezhinsky, Chief Economist at Meitav Investment House, explained that Israeli investors, both retail and institutional, have reached exceptionally high exposure levels to local stocks. He noted that the proportion of Israeli stocks in public portfolios is at its highest since 2010, with institutions net purchasing approximately NIS 40 billion ($11.5 billion) in local shares year-to-date. Mutual funds specializing in Israeli stocks also represent a record 18.4% of total mutual fund assets, excluding money market funds.
Zabezhinsky further pointed out that the Israeli market is expensive compared to global peers and its own historical valuations, a situation not supported by strong domestic economic growth. While export-oriented sectors like technology, particularly AI, are thriving, overall domestic activity, including real estate and private consumption, remains sluggish. Foreign investor holdings in Israeli equities have remained stable, suggesting their exit is not the primary driver of the decline.
Oron Bluttman, CEO of Analyst Mutual Funds, highlighted a shift in fund flows, with redemptions from mutual funds and a move towards safer investments observed since October and accelerating after the Israeli elections. He also raised concerns about the implications of the US midterm election results, suggesting a potential weakening of US support for Israel and increased risk of escalation with Iran, especially if former President Trump focuses more on foreign policy.
Eldad Tamir, CEO of Tamir Fishman Investment House, echoed concerns about the US election outcomes, particularly the Democratic control of Congress, and warned of potential negative impacts on the Israeli stock market and a strengthening dollar against the shekel. His firm also cited the possibility of a constitutional crisis in Israel stemming from election results as a source of investor anxiety.
Adding to the uncertainty is the potential cessation of US security aid to Israel starting in 2027, which Zabezhinsky estimates could cost Israel $8 billion over two years, potentially increasing the deficit by 0.5% of GDP annually. This geopolitical and fiscal uncertainty has led Zabezhinsky to revise his forecast, now believing the Bank of Israel will likely delay any interest rate cut, previously anticipated for November, until the political landscape clarifies.
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