The writer is one of the owners of Meitav Investment House
The article should not be considered a recommendation or a substitute for the reader’s independent judgment, or an invitation to make a purchase or investments and/or any actions or transactions. The information may contain errors and market changes may apply
The questions and doubts that occupied us in the past months in the fields of macro and investments will surely continue to occupy us in the new year as well, and demand answers. So here are ten answers to ten of the most burning questions.
1. Where will the Fed interest rate go?
Even Jerome Powell, the chairman of the Fed, does not know the answer, because it depends on the economic data for the coming year, mainly around inflation, and to a much lesser extent on the growth and unemployment data.
The Fed is determined to crush inflation and “put the genie back in the bottle”. He will try to do this without stifling growth along with stifling inflation, but his preference is clear – an uncompromising war on inflation. In my estimation, the interest rate in the US will reach between 5% and 5.5% by the end of the 2018 fiscal year.
2. Where will the interest rate go in Israel?
The Governor of the Bank of Israel does not know the answer either. Although inflation in Israel is almost half of that in the USA, it too has left the “safety zone” of the inflation target, which for many years has been in the range between 1% and 3%. Yaron Amir’s freedom of action is much greater than that of his counterpart in the USA, Because the opening conditions of the Israeli economy are much better than those of the USA. In my estimation, the interest rate in Israel at the end of 2015 will be between 3.25% and 3.75%.
3. What will oppress the stock markets?
Stock markets can suffer from a series of geopolitical events, if they occur, but right now the main risk comes from government bond markets, which are always an alternative to stocks. These bonds did not challenge stocks during a whole decade of zero interest rates, and stocks were “the only player in town”, but now everything has changed. You can buy two-year US government bonds and get an annual return (before tax) of more than 4 %, and it is possible to guarantee an annual yield of close to 4% by purchasing 10-year US bonds. Also in Israel, the yield to maturity of Israeli government bonds for two years is 2.9%, and for 10 years is 3.2% ( before tax).
4. Are US government bonds an investment opportunity?
Their yield is starting to be attractive, but in my estimation it will be more attractive in the coming months, as a function of the continuation of the aggressive process of interest rate hikes in the US, so the correct tactic in this area is their gradual purchase.
In any case, it should be taken into account that this is a dollar return, and the Israeli investor is exposed here to what will happen to the relationship between the dollar and the shekel (question and answer no. 7). Making the dollar investment in this case by hedging is not worthwhile, because the cost is high – 2.6% per year.
5. Is the corporate market more attractive in Israel or the US?
Corporate bonds in Israel have fallen since the beginning of the year (5.6%), along with the declines in the stock market and the government bond market, and their future yield has of course improved. However, when you compare the yield to maturity of the A-rated bonds, about 5%, to the yield offered by the corresponding government bonds with the same average duration, you come to the conclusion that the additional yield they offer compared to the government bonds does not compensate for the additional risk, especially in days of high inflation and interest that still has room to rise, which will make it difficult for some companies to refinance their debts, especially those that are leveraged beyond their capacity.
Corporate bonds in the US have also opened up margins against US government bonds, and the additional yield they provide (about 5% per year in “junk” companies and about 2% in high-rated companies) is significant.
But you have to remember that there are two problems with this. One – dollar exposure of those who live in Israel, and the second, the risk of an economic slowdown in the US is much greater than the risk of a slowdown in Israel.
6. What will happen to inflation?
The current inflation is fueled by two sources: supply problems – shortages due to closures in China, difficulties (recently eased somewhat) in the supply chains, the problem of Europe’s dependence on Russian energy and the price paid for disconnecting from it, and more. On the demand side, there is still active consumer demand, among other things thanks to the funds received by households around the world during the Corona period. The aggressive interest rate hike policy is designed to address demand, because the central banks’ ability to influence supply is limited.
It is very likely to assume that in the 2018-2018 period we will see inflation in Israel decrease from the peak rates to 2.5% to 3%. A similar process of a decrease in the rate of inflation is also expected in the USA and Europe.
7. What will be the shekel-dollar ratio?
The basic factors tend for a very long time in favor of the shekel. The reasons are known: growth in Israel is much higher than in the USA, capital movements and real movements to and from the Israeli economy are in favor of the shekel, the Bank of Israel has reserves of more than 200 billion dollars. This is not a coincidence even after a devaluation of more than 10% since the beginning of the year , the gate is the same as almost 30 years ago.
All of this may change in the event of a geopolitical flare-up in which Israel will be involved, and also due to something much more banal – declines in the Nasdaq, which lead quite immediately to the depreciation of the shekel. This is mainly due to the need for institutional investors to purchase dollars – also to neutralize the decline in the component of American stocks in their portfolio and also because of their necessity to complete collateral against the contracts they purchased on the Nasdaq.
8. Will the apartments continue to become more expensive?
Israelis have gotten used to the past decade and a half that apartment prices only go up, under the auspices of zero interest rates. But what they forget, is that the economic environment keeps changing, and it is difficult for their mindset to change at the same pace.
We moved from an environment of zero interest rates to a significant interest rate, which will affect apartment prices in several ways: the cost of mortgages has increased, and will continue to increase significantly, and at the same time, investment opportunities are emerging that compete quite well with investment in apartments, such as investing in government bonds.
So we should very well prepare for the curbing of the rise in apartment prices in the near future, and then for the beginning of a nominal and real downward trend, which will come not only from the direction of interest rates.
9. How will the markets react if China tries to conquer Taiwan?
This is the most frightening scenario from the point of view of the stock markets, as this could lead to a “Gog and Magog war” between the two superpowers, the US and China. But even if this does not happen, a Chinese takeover of Taiwan means taking over the chip industry, of which 85% The world is based in Taiwan.
10. What will the TA-35 stock indices, the NASDAQ and the DAX do?
After so many predictions have already been shattered in this area, I prefer not to risk an answer.