The upheavals in the markets, the inflation that reared its head in a big way and the interest rate hikes in the world put investors into a period of uncertainty. Even the solid channels that in previous crises were considered safe shores, when stock exchanges lost height, suffer from volatility and do not provide a sense of stability. Just last week, after the publication of the disappointing inflation data in the US – an annual rate of 8.3% – the leading indices on Wall Street fell sharply and lost 4-5%. Now, the markets are eagerly awaiting the Federal Reserve’s interest rate decision (on Wednesday this week), and are wondering How hawkish he will be in his war on inflation. It is very difficult to predict what will happen, and any statement may lead to another abnormal reaction in the markets.
■ The price the economy will pay for the victory of inflation – and 4 more articles on the situation in the markets
■ It seems that now is the time to go against the flow and invest in non-US stocks
■ Bank deposit, real estate or shares: where should you invest in days of rising interest rates?
How was the investment portfolio affected this year? The leading indices in the local stock exchange (TA 35 and TA 125) have lost “only” 3-4% since the beginning of the year, and achieved an excess return on most stock exchanges in the world. The reason for this is the bias towards finance and real estate stocks, which were less affected by the global crisis. In the US, the situation is more difficult for investors, as the S&P 500 index has been cut by 18.7% since the beginning of 2022 and the Nasdaq index, biased towards technology stocks, has lost 26.8%, also due to prices The highs that technology stocks reached last year.
When the goal of the central banks is to fight inflation through sharp interest rate hikes, not only the stocks are cut – the solid markets also behave in a way that makes it difficult for the average investor to find shelter. What can be done anyway? Four investment experts advise how to build an investment portfolio of NIS 100,000 according to different levels of risk.
Peaks: “Positive yield in the solid channel”
“The process of raising interest rates has hurt the risk assets (such as shares, but now gives a significantly higher return expectancy in the solid channels than we have known in the last decade,” says Erez Danaur, director of the investment system at Psagot Mutual Funds. In other words, due to the higher interest rate environment, In solid channels it is already possible to get a positive return today than before.
Erez Danaur, Director of Investments at Psagot Mutual Funds / Photo: Moshik Biran
Danaur: “In a low-risk investment portfolio, we would start with a 30% share allocated to a financial fund. In these funds, the inherent return is already over 2% per year, with zero risk. The return is also expected to increase with the upcoming interest rate increases. Another share is 20% in The government bonds with a medium MHA (average life expectancy). This share is expected to give an annual return of about 3%, also at a low risk level.
“Beyond that, we will allocate another share of 10% linked government bonds with a short maturity, which will provide protection against inflation. Another share of 30% will be allocated to corporate bonds with a maturity of up to 3 years. We will prefer bonds of companies with strong ratings high, and mainly flow companies with low leverage. Alternatively, you can prefer bonds with a medium rating but which will be backed by strong collateral, so that the credit risk will be reduced. The last 10% of a low-risk portfolio can be invested in stocks: half of the share linked to the S&P 500 index, and the balance in the TA 125 index. In our estimation, in the medium and long term, stocks will provide an excess return over the other avenues.”
For the medium-high risk portfolio, it is proposed in the summits to divide it into two parts. “Half of the portfolio (50%) will be invested in corporate bonds, combining bonds of strong companies with high ratings, or lower ratings with encumbrances, alongside medium-rated bonds with a wide spread. The other half we will invest in stocks, and here too we will divide into two: 25% of this will be invested in stocks in Israel, mainly in medium and large companies from the Tel Aviv 125 index, with an emphasis on insurance stocks and yielding real estate. The balance will be invested in US stocks in the leading indices there.
“In our estimation, after a year of strong declines, in the medium term the American market will be one of the first markets to recover, and the pricing of the shares there today is reasonable for investment purposes.”
The best: “TA 125 will benefit from the local delicacy”
Ideally, they will invest in a low-risk portfolio 100% in high-rated corporate bonds, with a maturity of up to 3 years, “thinking that this is a ‘maturity portfolio’ – that is, an investment portfolio that, once it is built, should not undergo any substantial changes, except when there is a significant deterioration in a company’s activity.” , says Aviram Naa, VP of investment portfolios at Meitav.
Aviram Naa, Vice President of Investment Portfolios at Meitav / Photo: Yeh’ach
Naa adds that “in such a portfolio, we would recommend that it consist entirely of bonds of companies with a high rating of AA minus or higher, with a selective choice of bonds, and all of them will mature within a period of up to 3 years. The goal is to balance the risks of inflation (in both directions, i.e. for continued price increases and also in the case of moderation). We will invest half of the money in bonds linked to the consumer price index and the remaining half in non-linked bonds.”
The maturity period for a period of up to 3 years is best recommended, “taking into account that most of the large companies in the Israeli debt market have taken advantage of the very favorable market conditions for raising that have prevailed in recent years, in order to arrange their disposal schedule”. Those companies, according to Naa, thus prepared enough cash in the treasury that would be enough for them, “even if the debt market itself is ‘closed’ to borrowing for a while (due to the crisis, 8th of September). We choose the very high ratings and give up the excess yield that exists in lower ratings. This With the thought that the slowdown in the economy that may occur as a result of the aggressive interest rate hikes we are experiencing, may harm the bonds with the lower ratings, in a way that is disproportionate to the additional yield they provide today.”
The riskier portfolio is best divided between 70% high-rated corporate bonds with a maturity of up to 3 years, and 30% of two stock indices. Thus, 15% of this component will be invested in the TA 125 index, and the balance (15%) in the American S&P 500 index. Half of the debt will be linked to the consumer price index and half in bonds that are not linked.”
“We will invest the remaining 30% in an equal distribution between the mentioned stock indices. Tel Aviv 125 is now about 8% lower than its all-time high, and in the last year it achieved an excess return over many of the stock indices in the world. Historically, it is not particularly ‘cheap’, However, it must be remembered that the Israeli economy is enjoying a period of prosperity and the outlook for the near future is also promising. Therefore, in a long-term view, MTA 125 is expected to increase the yield on the bonds. The S&P 500 index is now 20% lower than its peak and is trading at a future multiple close to its past average, and from a long-term perspective it is also expected to contribute to the yield.”
national: “There is more room for correction in overseas indices”
Roi Keren, a regional investment advisor at Bank Leumi, also offers two portfolios, one with a medium risk level consisting of several channels, and the first with 30% exposure to stocks. “We would like a bias towards foreign indices with an emphasis on the US, where the leading stock indices have fallen since the beginning of the year between 20% and 30%, and the country leads global growth,” says Keren. “The damage to stocks on Wall Street was due to the increase in inflation and the fear of the continuation of the trend of raising interest rates by the Fed.”
Roi Keren, Regional Investment Advisor at Bank Leumi / Photo: Dovrot Leumi
Today, according to him, “the main consideration is that the rate of inflation will probably slow down due to the effect of interest rate increases. Consumers’ inflation expectations have moderated, so I believe that the stock markets will react accordingly, as soon as we begin to see a decrease in the rate of inflation. In light of the differences in the performance of the stock indices between Israel and the United States, I believe that there is a lot There is more room for correction in the indices abroad compared to Israel, here the indices manage to maintain stability since the beginning of the year.”
Keren suggests that approximately 60% of the medium risk portfolio be allocated to exposure to bonds. “In Israel, inflation is lower and stands at an annual rate of 4.5%. The interest rate increases so far have been relatively moderate, but opportunities have arisen that we have not seen in the local bond market for many years. There is room to give emphasis to rated corporate bonds with a bias towards index linkage. A share of 55% (the bond component of the portfolio) will be linked and the balance – 45%, shekels. Also, a share of 10% of the bond component will be invested abroad. “Out of the total bond component of the portfolio, we will invest this portion in bonds abroad in light of the expectations for continued interest rate increases in the US,” Keren explains.
The balance in the portfolio (10%) will be kept liquid, i.e. in bank deposits or equivalent channels. According to Keren, “The interest rate hikes led to a resurgence in bank deposits. It is now possible to receive a risk-free interest rate, either fixed or variable and close to the prime rate, significantly higher than before.”
The portfolio with the high risk level will be divided between 50% in an equity component, “where a significant excess weight is given to foreign indices with an emphasis on the US. This is with the aim of taking advantage of the correction that will eventually come, with the moderation of the rate of inflation and a stop or stabilization in the trend of raising interest rates” says Keren . A share of 45% of this portfolio will be allocated to exposure to bonds – of which 30% are corporate, 10% government and 5% in foreign bonds. The rest of the portfolio (5%) will be held in liquid channels.”
Charm Excellence: “It is important to have a component of inflationary protection”
At the Kesem company from Excellence, they offer their own division for low and higher risk enthusiasts. For a low-risk portfolio, the chief investment manager, Ronen Kapeluto, recommends allocating 15% in stocks, 55% in corporate bonds with a high average rating and short-medium maturity, and another 30% in government bonds with short-medium maturity, and this in combination with deposits to maintain liquidity. In a medium-high risk portfolio, he recommends 30% investment in shares, 55% in medium-high rated corporations and short-medium interest rates, and another 15% in government bonds with short-medium interest rates, alongside deposits.
“In light of the challenge and the prevailing uncertainty in the markets,” says Capelloto, “it is important that every portfolio has an inflation protection component. At the same time, as the level of risk increases and the investment period increases, the inflation risk decreases.” In the context of the stock component of the portfolio, he points out that “as long as the interest rate environment in the world is on the rise, great caution is required in this part of the portfolio, as the adjustment of stock prices to the new interest rate environment is underway.”