Stock markets around the world are still volatile, and it is impossible to estimate how much longer they will remain so. After 2022, in which some of the world’s leading indices entered a bear market (a drop of more than 20%), came January, which opened the new year with a storm, when indices such as the Nasdaq and the Eurostoxx 50 ended the last month with a return of about 10%. However, over time it is clear that extensive exposure to shares increases the yield, especially when it comes to long-term savings products such as pension funds.
● A strong start to the year in the training funds: who led the returns?
● “The snowball is gaining momentum”: what does Globes’ pulse index say about the state of the economy?
● The Bank of Israel is concerned: in the event of a stock market crash, institutional stability may be compromised
In January, the average return on the shares route was 3.1%, led by Altshuler Shaham, who recorded a return of almost 4% due to high exposure to the American market, compared to an average return of 2.4% on the 50 and under route, to which new entrants are automatically assigned to the pension funds.
A look at the returns over time reveals that as the time periods get longer, the difference in returns between them and between the general routes grows. For example, in the last three years the average return of the seven pension funds (the Moore and Infinity funds were established last year and do not hold data for these periods of time), was 20% in the equity routes, compared to 19.6% in the routes for those aged 50 and under.
The gaps grow as the time periods lengthen
Apparently this is a small gap, since the high exposure to the stock market led the equity pension funds to a negative return of almost 9% in the past year, due to the declines in the markets in 2022 (in tracks for those aged 50 and under, it stood at minus 5.5%).
However, when looking at longer periods of time, the gaps between the “adventurous” routes and the more solid ones grow. In the last five years, the stock tracks have achieved a cumulative return of 35.3% compared to a cumulative return of 33.6% in tracks for those aged 50 and under, and as you extend the test period, the gaps keep growing.
“The constant saying is that you can’t time the market, and every day in recent times we see how true this is,” says Eran Kalinsky, VP of Investments at Mor Gamel and Pension. “The global stock market is very expensive, and the multiples on capital are very high, especially considering Facts – the leading economies are on the way to slowing down, with fears of a recession later, and interest rates are very high. But despite this, the pension avenues are long-term and for the young savers the stock routes will always be interesting.”
Guy Mani, Chief Investment Manager at Meitav Pension and Providence, says similar things. “This is not a bad instrument, especially for those who see upward optimism in the stock market in the coming years, and of course, when looking at the longer term, and not for one or two months. A saver who has another 30-40 years to retire, the stock market has a more positive expectancy than the debt market “, Manny explains.
Although they are called equity routes, since they are pension funds they benefit from about 30% protection of the portfolio. What was until last October protection through designated bonds, issued by the state, and which offered a yield of 4.86% linked to the index, became about four months ago an even higher protection, at a rate of 5.15%, as a result of a reform promoted by the previous Minister of Finance, Avigdor Lieberman.
“Bond yields have indeed risen in recent months, but we still do not see a government bond of the State of Israel that gives such a yield, and this is an advantage of the pension funds compared to the managers’ insurances (which do not enjoy the same government protection of the yield, R. F.),” he says Manny.
“We see that the markets have stopped to catch their breath”
The same 70% that the managing bodies freely invest in shares, they mostly allocate to shares abroad (about 70% of the component), and the rest to shares on the Tel Aviv Stock Exchange.
January was a good month for savers, how will February look in the meantime?
Klinsky: “We see that the markets have taken a step back and stopped to catch their breath. Since the beginning of the month, the markets have pretty much stood still in terms of yield in the world, and in Israel there is a decrease. The latest inflation data show that it is indeed decreasing, but at a slower pace than they thought, and the central banks continue to raise interest rates, and certainly not lower them So even if the interest rate doesn’t go up much, it will probably stay around 5% in the US for a long time, and this clouds the stock markets.”
What year awaits us?
Manny: “Ultimately the global bond market will record positive returns this year. In 2024, we expect to see the beginning of interest rate declines in the world, and following them in Israel as well. Once inflation is curbed and the Fed stops raising interest rates, the stock market will be stable, and will even have decent rate increases.
“In Israel there is also the political-legal issue, and it is understood that if a mechanism of agreed compromise is created, the shekel-dollar ratio will drop from the levels it is at today, and the non-correlation between the markets abroad and Israel will end.”
Klinsky: “There is no doubt that long-term high interest rates hurt demand. That’s why I expect damage to the companies’ results later this year, and that means even higher multiples than today. In the short term, I’m less optimistic about the stock market, and very optimistic about the bond market, because it’s the interesting one most, both corporate and governmental, both in world markets.”