A dramatic day that began with the wave of shutdowns in protest of the legal reform, sent the Tel Aviv Stock Exchange to gains of up to 2% on Monday, which reflected investors’ expectations for the announcement of the government’s halting of the reform. This after sharp declines in trading on Sunday, which continued the trend of volatility increasing in the local market. During such times the question arises as to what the investor can do who wants to protect his money, and perhaps even profit from the situation.
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CEO of Ilam Mutual Funds, Tamir Shapira, believes that if all year round risk management is the basis for building a balanced and correct investment portfolio, then recently the issue has become critical. “The name of the game in investments is risk management. “It is especially sharpened in light of the recent events we have experienced in Israel and around the world,” says Shapira.
In recent weeks, the economic world outside has also been undergoing quite a bit of upheaval, with large banks collapsing and being bailed out, and the fear for the stability of smaller banks in the US, alongside financial institutions in Europe, is increasing. Shapira wants to look at the broad macro picture and draw conclusions from it. “The second half of 2023 There may be a turning point in the markets”, he believes, as he says that “a moderation in inflation data, a halt in interest rate increases and even the beginning of a conversation about lowering interest rates” is expected later this year.
In his estimation, “the recovery in the markets will come first of all through the bond component, where great investment opportunities have opened up due to the drop in prices and the increase in the yields to maturity of the government and corporate bonds. In the stock component, in every wave of realizations as we have experienced in recent times, there is an opportunity to enter or increase a position in quality companies With excellent business results, whose price has fallen horizontally along with the entire market.” And in any case, he says, when building an investment portfolio, “emphasis must be placed on geographical, sectoral and currency dispersion. When such a division is carried out, all these elements give us a level of security, if the economic world goes to extremes.”
Relatively high stability
Shapira explains that one of the recommended ways to be exposed to the Israeli economy is through local bank stocks. According to him, they show great stability, much more than their counterparts abroad. In fact, the latest developments overseas have even strengthened this insight.
“The high interest rate hurt the activity of the regional banks in the US, and also the Swiss bank Credit Suisse. This was mainly expressed in the element of liquidity. The American banks, whose stability was undermined, developed a liquidity problem, because they invested the deposit money in US government bonds, during a period of climbing interest rates. Over a period of time, they incurred capital losses ‘on paper’. As soon as they needed liquidity, it became clear that the realization of these bonds He would have determined the loss, something that would have been deleted from their capital.”
And why the recommendation for Israeli bank stocks?
“The banks in Israel are supported by three factors that boost their profitability. The financial reports they published for the 2022 summary were the best reports in 15 years. The first factor that helps the banks in Israel is the high interest rate environment (the gap between the interest rate on deposits and that on loans has increased in favor of the banks, HH) The second factor is the positive inflation, and the third is the streamlining processes. In general, we believe that those who invest in Israeli banks, receive the arrival of the Israeli economy. Foreign investors who want to be exposed to the country also do so. Beyond looking at short-term effects, looking at longer periods of time, we optimistic”.
How do you build your investment portfolio today?
“The first anchor is in Israeli government bonds, which make up about 15% of the portfolio. Half of it (7.5%) in index-linked bonds and the balance in shekel bonds. In both cases, the average duration of the bond will be short-medium. After the layer of government bonds, we have a layer of corporate bonds that makes up 40% of the portfolio. Here, too, there will be a distribution of half (20% of the portfolio) close and half shekels.”
“Beyond these two levels, we will also hold bonds from abroad, an additional share of another 15% of the portfolio. Here we are dealing with dollar-denominated bonds, which give us another element of currency diversification. Finally, we will hold a share of 25% of the portfolio in a stock component. Here there will be a different dispersion between Israel and abroad. We will hold 10% of the portfolio in Israeli stocks in Tel Aviv and 15% in stocks abroad.”
Promotion of national projects
The balance, 5% of the portfolio will be in liquidity. “This is a component that will be invested in liquid deposits or financial funds. These funds will also be used to take advantage of opportunities, both in the equity component and the bond component. It should be noted that with liquidity you can get an impressive yield to maturity today. The Bank of Israel’s MCM (short-term lender) can grant 5% per year.”
What are your favorite sectors?
“As mentioned, the bank shares sector. This is against the background of the record results they achieved in the 2022 summary and the gap is huge compared to what is happening in the regional banks in the US and those in Israel. The capital adequacy of the Israeli banks is at a record high and is also very high, which increases their stability. Another sector is the infrastructure, through which it is possible to translate the population growth in the coming years into business. The government would like to promote national projects, which would give a ‘boost’ to the infrastructure companies. We estimate that the big projects that were in the pipeline will be budgeted and launched.”
“The third sector is natural gas, an industry that is expected to benefit from growing demand in Europe in the coming years. This sector also benefits from the weakness of the shekel against the dollar, as it has been since the beginning of the year. Gas exports mean sales in dollars or euros. The weakness of the shekel will help the sector.”
“Abroad, we will prefer the technology sector, with an emphasis on established companies. We have seen that the American government is expected to continue the large investments in areas such as the chip industry. The emphasis should be on leading companies in their field. Companies with a ‘deep moat’, that is, those that have a distinct competitive advantage over others. We will prefer cash flow companies with cash surpluses and established real activity.”
The victims of high interest rates
What should you watch out for?
“Sectors and companies that will find it very difficult to continue their business activities in view of the high interest rate environment or the expected economic slowdown. For example, leveraged growth companies, mainly referring to high-tech ‘dream’ companies that have not yet been established. These are companies that will have a very difficult time dealing with high interest rates that will make it difficult for them to raise funds.
“Another sector is the non-bank credit. The companies in it may suffer considerable losses due to non-payment of borrowers who will have difficulty repaying their debt, because the interest rates are rising.
“Another sector to be wary of is real estate companies in the US (BVI), which have raised bonds in Israel. In our opinion, they should be avoided due to the direct effect of the dollar interest rate going negative. You should also stay away from them because they may run into liquidity difficulties, when some of them already show weak balance sheets.”