The writer is the CEO of Alternative Capital from Clal Insurance
The inflation that Amira says forced the governors of the central banks to dramatic interest rate increases that we were not used to from the years before the 2008 crisis. The war through interest rate increases on inflation is limited because of the effect of the supply side, the supply chain, lack of raw materials and working hands. Therefore, no one has any idea how interest rate increases will affect inflation and the markets.
However, it is already possible to see the changes that inflation causes in the investment routes of our savings. Marketable stocks and bonds that cover most of the investment in the various savings channels are assets that on normal days are supposed to balance each other. However, in reality we have seen that when entering or exiting a crisis they tend to move in the same direction and the balance comes later. This was the case in 2009 when exiting the 2008 crisis when the stocks and the H moved upwards together. This is what happened in the first half of 2022, when stocks and bonds went down together. In the third quarter of 2022, we started to see more of a balance between them. That is, the balance systems that existed in the markets evaporated and disappeared.
A risk without a chance
The effect of stocks and bonds on savers is fundamentally different. In particular, when the modern savings world allows each saver to adapt the pension plan and change the choice according to his wishes without a tax event, this is in contrast to direct investment in the capital market. The range of choice available to a saver is wide, starting with the bond route with low risk and up to a stock-biased route with high risk. But this legality was broken recently, when the bond assets reached a peak in 2021 as a result of an expansionary policy and zero interest rates, and therefore contained a risk without a chance. The result was manifested in a negative return for savers, mainly due to the crash of bond prices worldwide. The transition between the routes is possible at any time, without taxation. Savers who assume that the stock market will be volatile with a negative trend, will choose the bond route that reduces risks on normal days. Savers who assume that the stock market is expected to rise, will choose the equity route.
One of the plans for pension savings that is intended only for retirees who receive a monthly allowance of about NIS 5,000 or more is a provident fund according to amendment 190. This plan allows the money to be withdrawn as a tax-free pension, unlike other plans, but only after the age of 60. It must be emphasized that the profit will not be Taxable when withdrawing as a pension. In addition, Amendment 190 allows the money to be bequeathed without tax on the profit.
Another significant benefit of amendment 190 is a lower tax payment compared to other savings routes. In Amendment 190 we will pay a tax of 15% on the nominal profit, instead of 25% on the real profit existing in all other programs. Nominal profit is the amount at the time of withdrawal minus the investment amount. In real profit, the effect of inflation is subtracted from the nominal profit. However, the increase in inflation reduces the tax benefit and makes investing in routes that provide a real profit more attractive.
The markets have lost balance
Choosing the right pension product and investment path for the saver will increase the potential profit and benefit for him. Various variables and components must be taken into account, as the result will differ from saver to saver. It is important to note that amendment 190 has alternatives, for example a savings policy, investment funds and even bank deposits. However, it is likely that the interest rates that the banks will offer will be lower than inflation, so investors will not benefit from protection of their money. Therefore, even if inflation impairs the tax benefits in Amendment 190, one should take into account the additional benefits that are in the route and decide after analyzing all the components.
In light of the fact that the markets have lost their balance and high volatility has arisen, investors around the world seek to stabilize their investment portfolios and reduce their dependence on the nervousness of the stock exchanges. The tool that may provide stability alongside growth that is not so vulnerable to the high interest rates and volatile stock markets, is the alternative investment. The conduct of the public markets creates a fertile ground for high volatility, and certainly in the current period of uncertainty. Building an investment portfolio with a significant alternative investment component produces a “healthier” investment portfolio, maximally diversified and independent of seasonal and non-economic factors. In alternative investment, it is necessary to carefully examine who the money is invested in, who manages the investment and whether these are regulatory supervised entities.