The author is the CEO of Agio Risk Management and Financial Decisions. The review and its content should not be considered a substitute for investment advice as defined by law
The public’s investment portfolios fell sharply during August, after a positive correction recorded in them in July. The directions and movements of the markets are determined according to the investors’ assessment of the determination of the governors regarding the expected interest rate increase, when the starting point is that the interest rate is rising, this is already a fact.
Investors in the stock markets are hoping for a change that will lead to the fact that perhaps, after all, the interest rate will not rise (the disappointing inflation data published yesterday in the US of course dashed this hope), but on the other hand, investors in the bond markets have no false hopes and it is clear to them that the interest rate will rise, and sharply, Especially after the Bank of Israel knocked on the table and raised the interest rate by 0.75%.
All of these led the stock indices to price increases that lasted deep into August, but they changed direction sharply at the end of the month, after the meeting of central bank governors in Jackson Hole. Compared to the softness of the stock indices, the bond indices decreased throughout the month, but similar to the shares, they accelerated their decline at the end of the month and as a result of all this, the Agio indices for the managed portfolios decreased accordingly.
The bond portfolio index closed the month with a significant monthly decrease of 1.64% and the stock portfolio index fell by 1.91%. Within the bond portfolio indices, the long-term bonds stood out negatively, which reacted strongly to the Bank of Israel’s interest rate increase, and in the stock portfolio index, stocks stood out negatively Abroad, decreased by about 6.5% according to their composition in the index, while the stock component in Israel actually increased by about 3.1%. The indices of the mixed portfolios also fell, at similar rates of about 1.7% each. Also, since the beginning of the year, all indices are in a negative environment of more than 6% in the bond portfolio and up to close to 7% in the stock portfolio.
Agio indices are an accepted benchmark for the performance of managed investment portfolios based on data from the leading investment houses in Israel, including Psagot, Altshuler Shaham, Kefilim, Migdal Shuki Houn, Excellence, EBA, Meitav Dash, Harel Financial, Tefanit Discount, UNIQUE and analyst. The data is obtained from the bodies that manage over 80% of the public’s investment portfolios. The indices constructed from this data track the aggregate investment portfolio of the public and constitute objective reference and comparison indices for the purpose of comparing performance and results of consulting and investment management bodies, performance of managed investment portfolios, training funds and more.
The markets are trying to run after the governors
The rate of inflation in the US crossed the 5% line towards the end of last year and already at the beginning of this year, and the interest rate began to rise in large steps. Israel’s economy is lagging with this process and is about six months behind the US, but even here, things are developing quickly and powerfully. The local inflation has also crossed the 5% line and is on the rise, and also in Israel the Bank of Israel has started raising the interest rate quickly, probably in steps of 0.75%.
Other countries, which are also experiencing an energy crisis that accelerates inflation to staggering levels, are in a greater grip with interest rates, but this does not affect the interest rate policy of the Federal Reserve or the Bank of Israel, the two economies and capital markets where most of the Israeli public’s money is held in investment portfolios. Both banks will raise the interest rate and quite quickly. The hope that the governors will “consider” the markets, the apartment prices or even the aspiration to lead to a soft landing of the economy, will not prevent a significant increase in interest rates.
At the beginning of August, a natural continuation of their behavior in July, the markets were still in a positive environment, with both stock and bond indexes rising. Towards the end of the month, disillusionment came in the US after the words of the American Governor Jerome Powell at the US Governors’ Conference, who clarified that due to the need Dealing painfully with inflation, he would not be able to spare the economy.This led to a quick disillusionment of investors, who listened to their governor.
In Israel, on the other hand, investors believe that the Bank of Israel will not be resolute and that it will, for example, attribute to the real estate sector, and will therefore refrain from a determined interest rate increase. Good luck, kick hard and step up to the field of the greats. Alternatively, it is clear to him that if, after understanding the map and hardening his positions, he does not act decisively and inflation continues to erupt, then the failure of inflation in Israel will be written on his name, even though he did not cause it.
Investors have nowhere to hide
It was difficult to see the year 2022 as a year that would contribute a positive return to the public’s investment portfolios, due to the inflation in the world that reared its head about a year ago and the interest rate that was bound to rise in its wake. Indeed, eight months into the year and the picture becomes clear, this is going to be a year, maybe a single one or maybe not, in which investors experience losses due to a trend of rising interest rates. It is true that the investors hope that the event will end soon and everything will return to normal and do not give due weight to the possibility that the interest rate will rise both this year and next year and there will be a continuous trend that oppresses the markets, stocks and bonds alike.
In terms of stocks, prices may suffer from one or both sources. One is the high interest rate as an alternative to risk and the other is the high interest rate as a cause of the slowdown in demand and the increase in costs, which will lead to a decrease in profitability. Also, the increase in interest rates is already making it difficult in the US and it will make it even more difficult in Israel to recycle the companies’ debts, and this will affect the entire perception of risk and the attitude of investors to the prices of the companies as well as to the prices of their bonds.
It seems that the interest rate, which is increasing, will continue to hit the markets from all sides and will make it difficult for the portfolios in the near future. This process is not in the making but in full swing, so all investors have to do is listen to the governors, who repeat things over and over again and explain that they have no choice but to try and stop inflation, which is a very negative factor for the economy and, ultimately, for the markets as well.