The year 2022 was anything but predictable. Almost every investor whose money was invested in some channel, whether eighty, solid or even in a bank deposit, suffered losses. It seems that the entire recovery from the corona, and from the closures and restrictions that accompanied it, was buried under the ceaseless developments – bloody fighting in Ukraine, upheaval in energy prices and a determined fight by central banks against rising inflation, through frequent interest rate hikes.
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Almost all avenues of investment succumbed to the macroeconomic events of the past year. Inflation has soared – a belated “reckoning” of the massive spending of funds by the governments in the corona crisis and the disruptions in the supply chain. The solid savings of the public were eroded, and those who invested in bond indices, which are considered a relatively safe haven, sometimes suffered negative returns like in the stock indices (the Tel-Bond 20, for example, fell by 10% this year).
The stock indices have obviously become the punching bags of the investors: TA-35 fell “only” by 9.6%, while the TA-125 index lost 12.3% this year. In the US the blow was more painful, the S&P 500 index has been cut by more than 20% in the past year and the technology stock index Nasdaq has fallen by 34%.
At the Tamir Fishman Investment House, they noted in the year’s summary that while there were channels that “gave excess performance, such as short-term (average life) bonds and variable interest rates, in the equity channel, after the last two years inflated the companies’ multiples, the interest rate environment increased and a return to sane pricing led to declines Sharp rates in most sectors, with the exception of energy.”
In any case, it seems that the interest rate hike regime is responsible for quite a bit of the damage caused to investors. Suddenly, the deposit in the bank gives a “normal” return at a single-digit rate, after over a decade in which customers received fractions of a percent. But on the other hand, inflation is still high, so those who “lock up” the money will see it erode realistically in relation to reality. That is, the products and services are still becoming more expensive faster than the interest rate is offering.
With 2023 upon us, and the global macroeconomic trends still with us, the estimates for the growth rate and stock market performance are converging on this. The leading investment houses in the economy estimate that the rate of growth in Israel will decrease significantly compared to the previous year, the dollar exchange rate is expected to maintain relative stability and the stock indices should climb compared to last year, albeit in a relatively measured manner.
The international environment has become sensitive, also at the geopolitical level, and the war between Russia and Ukraine has not yet been decided, including the mention of the unthinkable option of using nuclear weapons. Europe is still looking for a way to deal with being cut off from Russian gas, and to the east of there tensions are increasing between China and Taiwan, which could destabilize the entire region.
Danny Yardani, Altshuler Shaham’s VP of Investments, points out that “the year 2023 opens at a stage where it seems that, thanks to the interest rate increases, a moderation in the level of inflation is evident. We estimate that during the year the process of raising interest rates will reach exhaustion, against the background of the global slowdown and contraction of growth. This is a burdensome consequence of the aggressive restraint policy, but also a necessary step to cool prices.
“There is already a trend of falling real estate prices in the US, and we may see this in Israel soon as well. It is difficult to predict how this year will develop, but our assessment now is that when inflation gets closer to the central bank’s target, and the direction of the interest rate becomes clear – certainty will also return and the markets will rise again” .
In the assessment of Psagot’s chief strategist, Uri Greenfeld, in the coming year “it seems that the pendulum of the global economy will finally begin to swing to the other side. Global inflation is already showing signs of moderation, and the sharp interest rate hikes of 2022 will probably be fully absorbed during the year, returning inflation to a ‘normal’ level ‘”. According to Greenfeld, “On the real side, it seems that it will be difficult to escape a global slowdown, but we estimate that in combination with the drop in inflation, these will change the tone of the central banks around the world.”
The year that managed to confuse all forecasters: huge gaps in stock indices, inflation and interest rates
The year 2022 was perhaps the most difficult year to predict, given the upheavals and dramatic events that took place in it. With the exception of one parameter – the growth of the Israeli economy – the investment bodies missed their predictions by and large
The famous Heidi proverb says that “man makes plans, and God laughs” (in Yiddish this also rhymes). The year 2022 was perhaps the most difficult year to predict, given the upheavals and dramatic events that took place in it. This, after two years earlier an epidemic broke out in the world with an intensity not seen for at least 100 years. And so, with the exception of one parameter – the growth of the Israeli economy – the investment bodies missed their predictions by and large.
The average estimates were that the Tel Aviv-35 index would climb by 8% this year, but in reality it presented a mirror image and fell by almost 10%. Not even one of the 11 investment bodies surveyed estimated that the Tel Aviv index would end the year in decline.
Usually the estimates were for a single-digit rate increase. In the S&P 500 index the picture was much more extreme. The forecast was for an increase of 5%, but in practice the index was cut by about 21%. Only one body, Tamir Fishman, estimated that this index will decrease in the summary of the year, by about 5%.
The dollar exchange rate provided additional drama. We started the year 2022 with a dollar rate of NIS 3.11, which resulted from a huge tide in the fields of technology. For those who have trouble remembering, last year the start-ups still fought among themselves for programmers, and offered exorbitant conditions to every young flower in the world of programming.
The skits on TV talked about the distribution of Tesla cars to new employees, and everything was translated into the actual strength of the shekel. Later, the flow of investor money weakened greatly as technology stocks around the world collapsed.
Everything was drained to the dollar, which jumped by 13% against the shekel, and we end the year in the region of 3.5 shekels to the dollar. The forecasters estimated an increase of one tenth of what it actually was – 1.3% on average.
Get close in growth, don’t imagine the interest rate
Regarding the growth in the economy, this is a more informed assessment, which was actually close to the true data. The Israeli economy is expected to end 2022 with a growth of over 6%. We ended the third quarter with a growth of 5.7%, and these are the latest estimates. The forecasters estimated an average annual growth of 4.7% – a reasonable gap considering the events that eventually befell the economy.
The following two figures were of course part of the drivers of the drama in the financial markets. Inflation in the economy has risen at an annual rate of 5.3% as of these days (the December index will be published only in two weeks and will reveal the figure for price increases), twice as high as the forecasts of the investment bodies – who expected an average increase of 2% in the level of prices in Israel this year.
And of course, the Bank of Israel interest rate. This was predictably affected by the rapid and determined interest rate hikes by the Federal Reserve in the USA during the year, and the Bank of Israel could not afford to be left behind, otherwise we would have received a collapse of the shekel, which would have led to a much more dramatic jump in inflation.
Beyond that, as mentioned, the mainstay of high-tech funds has weakened significantly this year. And so, while the forecasters believed that at the end of the year the Bank of Israel’s interest rate would be 0.25% on average, we are in the midst of a new era with an interest rate of 3.25%, and further increases are possible on the horizon.
The stock exchange in Tel Aviv will cost less than in the USA
The investment entities that were able to provide their forecasts for the coming year are the investment houses Epsilon, Psagot, Altshuler Shaham, Analyst, Tamir Fishman, Meitav and Migdal Shuki Houn. In addition, Bank Leumi and Bank Hapoalim’s operatives company, and Lider Shuki Houn, also participated in providing the forecasts.
With reference to the local market, the average estimate of these investment bodies is that the Tel Aviv-35 index will rise by 6.6%. In the higher range, Epsilon, Tamir Fishman and optimistic activists estimate that it will climb 12-13%, and in contrast Leumi, Meitav and Leader Capital Markets are watching Because the index will decrease by about 2% in the coming year’s summary.
In the year ending, the TA-35 index produced a “solid” return relative to other international stock indices, when it “only” decreased by about 10%.
As for the leading index in the American market, the S&P 500, the forecasters believe that it will climb by about 13% in the summation of 2023, an increase almost double that predicted in the Tel Aviv index. The index ends the current year (as of 28.12) at a level lower than 3,800 points, a gap of almost 1,000 points from its level at the end of the previous year (4,766 points).
The dollar will not maintain its strength against the shekel
The dollar exchange rate today hovers around NIS 3.54, at the end of a year of many upheavals. The collapse in technology stocks on Wall Street tends to have an immediate effect on the strength of the shekel. The reason is the flow of dollars from technology investors in Israel, which in the last decade has led to a constant strengthening of the Israeli currency, and a policy of foreign exchange purchases (mainly dollars) by the Bank of Israel, with the aim of calming it down.
We started the year 2022 with a dollar rate of NIS 3.11, and since then the dollar has strengthened relative to the shekel by about 14% by the end of the year. This is actually a positive investment channel, which beat the traditional channels in this difficult year.
The investment houses tend to estimate that this year the shekel will gradually strengthen against the dollar to an average of NIS 3.37. Most of the estimates at the heart of the consensus are for a ratio of NIS 3.4-3.45 to the dollar, and the only body that estimates a significant strengthening is Bank Leumi, with a forecast of NIS 3.18 to the dollar.
The interest rate will climb further and growth will be modest
And again from the local angle, the popular assessment among investment houses is that the Bank of Israel interest rate will average 3.78%. Three of the investment houses anticipate interest rate increases up to 4% in 2023, and others believe that the interest rate will range between 3.5%-3.75%.
In any case, there will be two to three interest rate increases from its current level – 3.25%. For those who have already forgotten, until February of this year the interest rate was only 0.1%, before the drama began in the global monetary arena.
And how much will the Israeli economy grow? The forecast is for a modest rate of 2.5% in the coming year, compared to a figure of over 6% in the summary of 2022. The estimates of the investment houses range from 2% in Epsilon, Psagot, Analyst and Meitav, to a growth of 3.4% predicted by Bank Leumi.
And if we return to the burning issue of inflation, there is actually a certain line here. The respondents believe that the rate of inflation in Israel will average 2.7% this year, almost half of its rate in the last 12 months (5.3%). Only one body believes that inflation will move in the high range of 3.5% at the end of the year.
Recommended sectors: chips, communication and food
We asked the investment bodies to specify which sectors they think are recommended for investment in the coming year. The field that gained the highest popularity is the field of chips. In 2022, a severe shortage arose in the supply of chips, which disrupted entire industries, such as the world’s automobile production. Altshuler Shaham, an analyst, and Tamir Fishman (who mentions the semiconductor sector) put their gold on chips as one of the sectors that will stand out positively.
The broader field of technology is loved by leaders and activists, and not far from it, the field of communication is also recommended – by Leader and Meitav.
The food industry receives a recommendation from Epsilon, even though its shares were hit sharply in the past year, “but the food companies will continue to benefit from strong demand even during a slowdown in economic activity. In our estimation, the companies will be able to pass costs to the consumer in full,” say Epsilon, “and the drop in the prices of raw materials and transportation, which we are witnessing now, is expected to help the profitability of companies in the industry in the future.”