A look at macroeconomic data, which indicates how investors view Israel, can be misleading. There is a series of data indicating serious concerns on the part of investors, while there is the shekel-dollar exchange rate and the Tel Aviv Stock Exchange (TASE) that convey a feeling of relative stability, even though the security situation has been tense. Increasing day by day.
Let’s start with the risk factors. First, the risk premium on 10-year Israeli government bonds in terms of credit default swaps (CDS), an instrument that contains the cost of insurance against the fear that the State of Israel will not be able to repay its debts, jumped to a higher level. Higher than at the beginning of the war. As of today, it is close to 180 pips, the highest level in 12 years.
Additionally, even when you look at 10-year dollar bond spreads, you get a worrying picture. The basis point is the ten-year US bond, which is considered a “risk-free asset”, and the spread is the difference between the returns demanded by investors. In simple terms, if US bonds yield 3.8%, Israeli bond investors will return 2% more. By comparison, these are very high risk levels as in countries like Mexico.
The local bond market is also indicating distress. The yield on 10-year shekel bonds crossed the 5% mark in recent days and reached a two-month high. This means that investors demand a higher return as compensation for taking on higher risk. Unlike stocks, government bonds behave directly according to the state of the Israeli economy. For example, the Tel Gov-Shekel 10+ index, which includes government bonds furthest from maturity and therefore the riskiest index from an investor’s perspective, was trading at an implied yield to maturity of 5.32% on Wednesday.
Shekel stabilization factors
On the other hand, and somewhat surprisingly, there is the shekel-dollar exchange rate. If we look at the representative interest rate of the Bank of Israel on the eve of the war, October 6, it was 3.86 shekels per dollar. Today, the representative price is $3.75. Why is this surprising? Until a few months ago, market estimates were that escalation on the northern front would lead to a significant jump in the exchange rate, even to the level of 4 shekels to the dollar, as we saw at the beginning of the war. Although there has been some devaluation in recent days, it has not been dramatic. Nor are the fluctuations as severe, unlike in the early days of the war, nor during the struggle over the government’s controversial changes to the judicial system last year.
How can this be explained? There are several reasons. First, the role of the Bank of Israel. At the beginning of the war, it launched a major plan to sell up to $30 billion of its foreign exchange reserves amounting to more than $200 billion. In the first weeks, the bank sold about $8.5 billion, strengthening the value of the shekel. Since then, the price has remained fairly stable, ranging between 3.5-3.8 shekels to the dollar. The fact that the market knows that the Bank of Israel is in the background with its large foreign currency reserves plays its role.
The second reason is the connection between what is happening on Wall Street and the shekel. The rule of thumb that held true until the judicial reform battle was that as the US stock market rises, the shekel strengthens. The reason: the need for institutional investors in Israel to hedge their investments. The strong performance of US markets this year also supports the strength of the shekel. The assumption is that even if the correlation does not work as well as it did in the past due to geopolitical risks, it is still influential.
Finally, there is the role of foreign investors, who during crises are expected to be the first to leave. The prevailing assumption in the market is that a large portion of them left the market at the beginning of the war, while those who remained have simply become accustomed to reality over the past year. However, it is worth noting that according to numerous estimates, including those previously provided by the Bank of Israel, without the war and internal political crisis in 2023, the shekel would be significantly stronger today. The exact amount is difficult to estimate, and estimates can range as high as 0.30-0.40 shekels per dollar.
“Drawing optimism”
“As things currently stand, Israel is holding the reins and controlling the tone,” Robert Carmeli, chief investment officer of Four Seasons at IBI Group, told Globes. “This, while Hezbollah maintains a relatively restrained response. It can be assumed Investors derive from this, and no less important, that the series of strikes directed by Israel against the terrorist organization mitigates the disaster scenario that was looming regarding the outbreak of war in the north.
Carmeli points to the shekel-dollar exchange rate and the performance of the Tokyo Stock Exchange, which this week showed a series of gains despite the expansion of the campaign against Hezbollah. According to him, one of the reasons for this is “the positive momentum in the United States after the relatively large reduction in interest rates, which in turn contributed to breaking records on Wall Street.”
He adds: “We must remember that the local market is lagging behind other markets, having recorded a significant weak performance. So, as long as there is an opportunity and a little optimism to reduce the gaps, we see that happening – albeit gradually and in accordance with that.” With the ongoing developments on the northern front.”
“A large-scale war, both in terms of the scope of the fighting and the extent of the damage on the home front, if it occurs, is something that would have a much worse impact in terms of the stock market,” warns Bank Hapoalim Research Unit Director, Yaron Friedman. and exchange rates.”
Published by Globes, Israel Business News – en.globes.co.il – on September 26, 2024.
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