The world and Israel are plunging into an economic slowdown, and unemployment is expected to climb, and on the other hand, inflation, which soared last year, should begin to “relax” in 2023. The economic forecasts prepared for the new year by the research department at Bank Hapoalim and the financial markets division at Bank Discount indicate a fear of an emerging economic slowdown, and also offer ways of defense for investors.
● Where will the interest rate go and where should you invest? The predictions of the investment experts
● Investment experts summarize 2022 and provide predictions for next year
● The stock market sums up the year: Delek Group has the highest return, and who lost the most?
The past year was characterized by sharp price drops in the stock indices on the stock exchanges, as well as in the solid channels. In the USA, inflation jumped to a record rate of 9.1% in the summer, and has weakened since then. In Israel, Bank Hapoalim estimates, inflation at an annual rate of 2.5% is expected in 2022. The “sticky” part of inflation (the one that arises from demand, reflecting the rise in prices of services) will decrease Only gradually in their estimation, and will force the Bank of Israel to leave the interest rate at its high level for a long time.
Discount Bank states that the inflation in the summary of the past year is expected to amount to about 5.5%. As for 2023, the bank says, “we will see a moderation to a rate of 3.1% a year ahead, and 2.7% at the end of the year.”
One of the factors that will have an impact is the housing section which “will continue to be a significant factor in inflation, although it is expected to moderate, in view of an expected increase in unemployment, an erosion of the real wage and an increase in the supply of apartments (due to an increase in the completion of construction)”.
In addition to this, Discount points out, “Inflation in the coming year will be significantly affected by government measures, including the abolition of the tax on soft drinks and disposable utensils, the increase in electricity and water rates and wage agreements in the public sector.” The market, however, is pricing in inflation that is slightly lower than its forecast, at a rate of 2.8% this year, according to the bank.
As for the level of interest going forward, Bank Hapoalim says that interest rate increases by the central banks, after an aggressive move last year, will continue in 2023 as well, albeit at a more moderate pace.
In the US, the interest rate is expected to climb to the level of 5%, and in Israel, Governor Amir Yaron is expected to raise the interest rate up to the level of 3.7%-4% at the end of the first half, in two or three increments of 0.25%.
Assuming that inflation expectations will drop to about 2.5%, say Bank Hapoalim, the Bank of Israel’s interest rate is expected to be at a realistic rate of about 1.5%.
Bad news should come from the labor market. Discount estimates that the low unemployment rate that accompanied us in the last two years, after the recovery in 2021 from the damages of the corona virus, is about to change significantly again.
The economists point out that “cracks discovered in recent months in the growth of the local economy also spilled over into the labor market, and thus we saw the unemployment rate rise in November to 3.9%, while the participation and employment rates decreased.”
They further add that it is already possible to notice a decrease in the rate of vacancies, with the high-tech services sector particularly prominent in a sharp retreat. In their estimation, combined with the expected slowdown, unemployment in the economy will rise beyond 5%.
As for the economy’s growth rate in the coming year, Bank Hapoalim estimates that it will stand at 2.5%, so that it will reflect a low per capita growth of 0.5%. It is also noted there that “we are already in a similar growth environment in the second half of 2022, so it is difficult to say that this is another significant deterioration compared to the existing situation.”
Discount estimates that after the economy grew at an estimated rate of 6.2% in the summary of 2022, this year growth will be recorded at a rate of 2.5%, and that the two main engines of growth on the eve of the crisis – private consumption and high-tech – are expected to suffer from weakness.
The forecasts of the two banks for key macroeconomic parameters
The forecast of the workers
● Growth in Israel – 2.5%
● Fed interest rate in the USA – up to 5%
● Bank of Israel interest rate – 3.7%-4% (at the end of the first half)
● Areas of activity – USA, East Asia (with an emphasis on China), Europe as a lesser priority
Discount forecast
● Growth in Israel – 2.5%
● Unemployment in the economy – over 5%
● Inflation rate in Israel – 2.7% at the end of the year
“Potential to create a correction in the stock market in 2023”
Despite the forecast for an economic slowdown, there are also bright spots. Bank Hapoalim assesses the potential for price increases in the stock market. “The horizontal and aggressive decline in multiples over the past year in growth stocks has led to the creation of a potential for correction during 2023,” Bank Hapoalim economists point out. They add that this is especially evident “among established growth companies, with stable cash flow and low debt.”
But due to quite a few risk factors in the capital markets and the economy, Bank Hapoalim emphasizes the desired risk management through a combination of value stocks with a significant weight, in order to reduce the level of risk and volatility in the investment portfolios.
In the debt market in Israel, the Hapoelim point out, there may be a recovery and a decrease in bond yields, and they recommend that 45-55% of the portfolio be allocated to the shekel channel. In the global debt market, they recommend focusing on short-term government bonds and investment-grade corporate bonds. Bank Hapoalim emphasizes that high yields, which look attractive in the short term, do not compensate for inflation.
Practitioners estimate that the coming year will be challenging for the companies. According to them, a “damage to the profitability of the companies is expected against the background of the increase in interest rates in the US to a restraining level (around 5%), and the estimates are that the transition to interest rate reductions is still far away, and is expected only towards the end of 2023. However, since the financial markets are strongly influenced by expectations, any attempt to time the markets It is often expected to end in a loss, and the recommendation is to build a balanced and diversified portfolio, which includes growth stocks (technology and industry) alongside value stocks (healthcare, value stocks and the Dow Jones index), according to the client’s risk level.”
“Excess yield in the US, attractive pricing in China”
Among the geographical regions that Hapoelim mark as recommended for investment is the USA, which is receiving “excessive yield” thanks to responsible monetary management and low unemployment, attractive multiplier levels and a possible return to an expansionary monetary policy later this year. On the other hand, the dangers there are an increase in unemployment and a prolonged economic slowdown than expected.
Another investment area is East Asia, with an emphasis on China. There, according to the bank, the pricing levels are attractive in historical comparison, and there are positive change trends in the political attitude towards the technology companies. On the other hand, they point to the “zero-Covid” policy in China as a risk factor, as well as the possible crisis in real estate.
Europe is in the “market return” recommendation in Hapoelim, and what supports investment there is the sharp devaluation of the euro, which may support exports. But the increase in energy costs this coming winter and the effect of the campaign in Ukraine are risk factors. Bank Hapoalim states that in the capital market of Tel Aviv the volatility will continue in 2023, and that the variation between the branches and between the different companies will continue to be very high.
Accordingly, Bank Hapoalim recommends that “the equity component will be invested preferentially in selected stocks (Stock Picking) and less in indices, and that the component allocated to indices will be focused on the large stock indices (TA-35), which are characterized by a higher weight to value stocks, and less to the mid-sized stock indices (TA -90) and small businesses (SME)”.
Teva and ICL are among the recommended stocks
Among the stocks they recommend in Bank Hapoalim is nature which recently appointed a new CEO.
In their estimation, the company is expected to leave the opioid affair behind it, and register growth in its innovative activity, with an increase in the revenues of the original drugs Ajobi and Ostado, at the expense of the fading Copaxone.
Another recommended is I.C.L , the potash producer that benefited this year from the increase in commodity prices. Bank Hapoalim believes that the company is expected to present excellent results in 2023, although less good than in 2022, among other things because a price of over $1,000 per ton of potash, as recorded last year against the background of the Russia-Ukraine war, is not sustainable in the long term time.
In the field of yielding real estate, practitioners point out that last year the companies achieved “strong operational results from their activities in the local market, which resulted from an increase in occupancy rates, real rents, the increase in the index, the cancellation of the Corona relief and the decrease in real interest expenses.”
However, the office market is “beginning to creak under the impact of the slowdown in high-tech”, and looking ahead, Bank Hapoalim warns that “the damage to households’ disposable income as a result of interest rate increases may begin to manifest itself next year in tenant redemptions and in the results of malls and shopping centers.”
Also, “the office sector may experience a decrease in demand in the coming year in the face of the possibility of a significant increase in the supply of square meters of offices in the coming years.” Among the recommended stocks in the sector are Azrieli andMelisron and among those with extensive activity abroad – Arrow oaks .