The prospect of a ceasefire agreement in Lebanon encouraged investors who had been hungry for good news for a long time. The narrowing gaps between the returns of major indexes on the Tel Aviv Stock Exchange and those on leading stock indices around the world suggest that investors are pricing in an imminent end to the war. At yesterday’s close, the Tel Aviv 35 Index was up 22% year to date, compared to a 26% rise for the S&P 500 in the same period.
The shekel has also responded positively to recent diplomatic developments, rising sharply against both the US dollar and the euro, after it was reported yesterday afternoon that the US had informed the Lebanese government that a ceasefire would take place “within hours.”
The question that arises is how the arrangement in the North will affect the financial markets. Has the rise in Tel Aviv stock prices exhausted itself? Or will the local stock market continue to outperform the world? Will the shekel continue to rise in the long term? How much will government bond yields fall? Globes asked senior analysts for their opinions.
Ronen Menachem, chief market economist at Mizrahi-Tefahot Bank, told Globes that from his point of view, a ceasefire on the northern front would be a very positive development on the economic level, both on the financial level and on the level of sentiment in the capital market.
“We will likely see a tendency to additional stock market rises and strengthening of the value of the shekel, which is already happening, another slight tightening of spreads on corporate bonds, and a further recovery in government bonds. However, this must be taken into account. Taking into account Because of the long duration of the war and its intense impact on the economy, the adjustment will take some time, and it is fair to assume that all parties will wait to see what the mechanism is and whether it will be implemented or not. Therefore, there will be nervous volatility in the short term. However, every violation of the ceasefire will Fire may Leads to market turmoil.
“In any case, much depends on the question of whether the damaged economic activity in the north will be resumed, and the large government expenditures to repair the devastation inflicted on the region must be taken into account. Moreover, since speculation about the agreement being drafted has been circulating for weeks, Some of the positive effects I mentioned have already been priced into stock, bond and foreign exchange markets, and it is not clear how significant the actual signing of the agreement itself will be.
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“One possibility is that the rise in the value of the shekel will be coupled with rising prices in the local stock market, which may make investors consider shifting some of their investments from abroad to the local market, although it is important to remember this because of the optimism about the economy and with the policy of the president-elect. Trump, US markets can certainly remain attractive next year even after the rises witnessed in the past two years.
Ran Sinai, chief economist at Ultra Finance, supports Menachem’s view, explaining: “The situation in which IDF forces are on the ground in the north at the same time as Hezbollah is firing on settlements inside Israel has become part of the army’s routine.” “Israeli.” The Israeli economy At the same time, increasing talk about the possibility of reaching a settlement in the north in the near future raises optimism in the markets, with the expectation of a positive impact on the economy.
“The improvement in the productivity of companies returning to routine work, coupled with government spending to rehabilitate the northern region, could signal the beginning of a positive trend in the capital market. Such optimism could also contribute to increased foreign investment in the economy, which in turn could To strengthen the shekel.
“In this case, it is recommended to monitor bonds and stocks of public companies that have production facilities and significant activity in the north of the country. However, it must be taken into account that the improvement in production will only become noticeable in the next financial year.”
What sectors will the ceasefire strengthen?
Menachem stresses that the rises in the local stock market occurred even before negotiations had reached their conclusion on an arrangement that will now have to be tested, so that from the standpoint of timing an entry into the stock market or an increase in exposure, caution and judgment must be exercised. “The domestic market has largely closed the gap compared to, and in some cases surpassed, overseas markets, so it is not as cheap as it was even a few weeks ago, and this needs to be taken into account in pricing considerations.”
He also explains that at the same time, negative sentiment due to the continuing deterioration of the security situation sometimes leads to a very significant decline in the market, and when things take a positive turn, there will always be companies that suffer a severe recession and that will be the first to recover. “In this context, growth companies can be an interesting option. In addition, to the extent that there is sustainable calm, the sectors that are supposed to have been hit the most are construction, agriculture, tourism and handicrafts, which are among the sectors that… “It should have been more damaged than others.” It’s early to recover, but here too the process will not necessarily be smooth and quick.
“Energy companies have managed to operate despite the tension in the North, but a calmer security situation should be good for them. On the other hand, companies and sectors with inelastic demand, which were less affected during the war, such as… That supermarket chains, or health care companies, would receive a smaller payment from the ceasefire.”
In conclusion, Menachem raises another question, which is whether a diplomatic solution will lead to the return of foreign airlines to Israel. “If this happens, not only will the situation of local hotel and tourism companies improve, but also the cost and availability of raw materials and production inputs for industrial companies,” he says.
What about the interest rate at the Bank of Israel?
Yesterday, the Bank of Israel announced its decision to leave the interest rate unchanged at 4.5%, in line with market expectations. A few months ago, voices began to be heard saying that the Bank of Israel would raise interest rates, but recently expectations have shifted from a rate hike to a rate cut, as markets begin to price in the end of the war. .
Menachem estimates that, assuming there is a easing of the security situation that helps investment recover and leads to a sharp rise in the value of the shekel, inflationary pressures will also diminish (except for the one-time effect of raising the value-added tax rate). The Bank of Israel could, within a few months, consider lowering the interest rate. He added, “The basic scenario still indicates that the interest rate will not fall before the middle of next year, but if we see a decrease in the intensity of the fighting, and the value of the shekel continues to rise, it is possible to reconsider matters.”
Published by Globes, Israel Business News – en.globes.co.il – on November 26, 2024.
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