| Ronen Menachem, Chief Economist of Mizrahi Tefahot
Until recently, the Israeli stock market demonstrated a relative advantage over foreign markets, but now, “after the holidays,” serious tests have been set for it. .
Second, after raising the to 0.35 percent, we are ahead of a round of further interest rate hikes. Although their number and scope will probably be lower than in the world (and especially in the US), there will still be a more challenging period in terms of the cost of raising capital.
Third, the summer session of the Knesset opens – and in the absence of a majority for the coalition, fiscal stability is undermined (precisely after the momentum of last year’s budget approval) and the “smell of elections” will accompany the markets. We know very well how important budgetary continuity is for credit rating companies and foreign investors, and it will also allow the Bank of Israel to carry out more gradual restraint.
Fourth, the deterioration in the security environment following the recent terrorist attacks and the rigid rhetoric looking ahead. To all this will be added the financial statements season to the summary of the first quarter of 2022, which will reflect, for the first time, the implications of the conflict in Ukraine on the business sector.
A routine reporting season highlights various companies for better or worse and their stocks are subject to sharp volatility. When it occurs against the background of all the tests I have mentioned, the reporting season this time can be more “nervous” than usual.
Meanwhile, we are witnessing a sharp and rapid devaluation of the exchange rate, a phenomenon to which we have not become accustomed in the past year or two, with widening effects on the rate of inflation and further support for the Bank of Israel’s intention to raise interest rates again later this year.
The depreciation of the shekel stems both from the strengthening of the dollar in the world and against the background of local problems – and evidently, the shekel also weakened against the US.
However, keep in mind the factors that work in favor of the market. First, in light of the very low budget deficit, government raising is also small and will partially offset the impact of raising interest rates on the cost of capital (less competition for the business sector).
Second, growth figures are still good and so is unemployment.
Third, the devaluation of the shekel will help domestic exports (even if world foreign trade is currently slowing).
Fourth, local sensitivity is less sensitive to oil and gas than in Europe and the United States.
Overall, overseas markets may also push the domestic market towards declines, but their strength and sustainability with us will be affected, among other things, by the development of the reporting season and the local considerations I have detailed.
The author is the chief economist of Mizrahi Tefahot Bank. This review is not a substitute for investment marketing that takes into account the data and special needs of each person.