2023-08-01 07:53:00
Title: Solid Investments Make a Comeback as Investors Seek Low-Risk Opportunities
Subtitle: Interest rate increases revive interest in solid channels as investors diversify portfolios
by Shmulik Ben Aryeh, Chief Investment Manager – Israel
In recent months, there has been a significant awakening in the solid investment channel, which has been dormant for the past decade. With the S&P500 index showing a 20% increase since the beginning of the year, many investors are questioning the rationale of investing in low-yield deposits when higher returns can be achieved in the stock market. However, it is important to understand the role of solid investments in an investment portfolio and how to optimize their potential amidst the current market conditions.
While it is true that in the long term, investments in equities tend to yield higher returns, comparing them directly to solid investments is misleading. This distortion was created in the market over the past decade and a half when interest rates were near zero and solid routes offered minimal returns. As a result, investors were forced to take on higher risks to achieve any significant returns. This led to a decline in the popularity of solid instruments and an increase in equity investments.
The recent shift in interest rates has changed the risk/opportunity ratio in solid investments. It is now possible to obtain reasonable returns with lower risks, making solid channels a viable option once again. This change has opened up interesting alternatives for investors with short investment horizons or those seeking to avoid the volatility of stock indices.
When considering solid investments, two main financial instruments have gained traction: bank deposits and financial funds. While bank deposits are the more convenient and simple option, it is crucial to consider three variables before making a decision.
The first variable is the investor’s forecast regarding inflation rates. Bank deposits are subject to a capital gains tax of 15% on nominal profits, while financial funds face a 25% tax on real profits.
The second variable is the expected continuation of interest rate increases. Bank deposits offer higher yields for longer-term fixed interest deposits, but if interest rates continue to rise, investors will not benefit from these increases. Financial funds, on the other hand, automatically reflect interest rate increases in their returns.
The third variable is liquidity. Bank deposits are not liquid, meaning investors must wait for the agreed-upon period to enjoy their returns. Financial funds, however, offer daily liquidity, allowing investors to sell their holdings and enjoy accumulated yields whenever they wish.
Diversification is key when building an investment portfolio. While the S&P500 offers high returns, it is essential to spread investments across different channels and evaluate their performance in relation to relevant indices.
One promising option within solid investments is the negotiable corporate debt channel. Corporate bonds rated A or higher can provide attractive opportunities for investors seeking moderate risk levels. Examples of corporate bonds with yields of around 6% include Beit HaZhav Bond D, Delek Group La Bond, Israel Canada Bond V, Medifaor Bond B, and Navits Bond B.
Overall, the recent interest rate increases have improved the risk/prospect ratio in solid channels, making them a viable option for investors looking for low-risk opportunities. However, it is important to seek personalized investment management that considers individual data and needs.
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About the Author:
Shmulik Ben Aryeh is the Director and Chief Investment Officer of the local market at Pioneer Capital Management.
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