The series of successes achieved by the Israeli army in the war with Hezbollah, most notably the killing of the organization’s leader Hassan Nasrallah last Friday night, is the main reason for the sharp rises in the stock market in Tel Aviv yesterday, according to Zvi Stipak, founder and head of the Hezbollah organization. . Mitav Investment House. The Tel Aviv 35 Index rose by 1.02% yesterday, after rising by about 5% last week, when the series of dramatic strikes against Hezbollah began, although it declined slightly in early trading today.
Speaking to Globes, what Stipak expressed surprise was actually the decline in yields on Israeli government bonds, despite the double downgrade of Israel’s credit rating by Moody’s on Friday. Stepak estimates that it will take some time before the credit rating is raised again, even if the war in the North ends earlier than we expected.
“The market has put Moody’s announcement aside, but you have to distinguish between the stock market and the bond market,” Stepak says. “In the short term, the impact of the rating downgrade by Moody’s should be on the bond market, and indirectly on the stock market.”
In his view, what has boosted stocks is “our series of achievements in the war against Hezbollah, including the assassination of Nasrallah. This is more closely linked to the stock market. From this point of view, I am not surprised that the stock market has risen.”
Why?
“Because the fears that were prevalent until a month or two ago, and even years ago, regarding the war with Hezbollah, which had a stockpile of 150,000 missiles and so on, have diminished or greatly diminished. In that sense, even now it has Hezbollah’s capabilities were limited. The fear was to hit the energy infrastructure, for example, and so we are now seeing a sharp rise in oil and gas stocks on the stock market. As far as investors and the market are concerned, the serious damage to the Israeli economy has decreased.
What else affects the stock market?
“The market is estimating that the war may be shorter than we thought. This also has implications not only for the stock market, but, in this context, also for the bond market, because if the market estimates that a war will break out.” If it were shorter, there would be less pressure on the defense budget, on the fiscal deficit, on the government and so on, and this goes some way to offsetting the large credit rating downgrade by Moody’s at the end of last week.
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Overall, most government bond indices rose, despite the downgrade. Does this surprise you?
“The bond market surprised me. I would not have been surprised if, for example, Moody’s downgraded Israel by one notch and left the rating outlook negative. But they downgraded it twice, two notches, and still left the rating. The outlook is negative, so perhaps it was expected that we would see a rise.” In Israeli government bond yields (decrease in prices).”
However, it is too early to celebrate. “What’s more important is to see what’s happening around the world (with trading opening on Monday) where foreign investors are looking at things differently,” Stepak says. “As far as we are concerned, Israeli government bonds are a debt that the government will pay to us. But foreign investors have their own criteria for classification with which they invest in different countries and do not invest in other countries. So they can invest in other countries. Maybe some of them are nervous (about investing in Israel) because they have investment committees, in pension funds, universities, etc., and there may be pressures there, even if Israel is still rated investment grade.
“There is no reason for ETFs that invest in sovereign debt to sell Israeli government bonds, because Israel is still part of the investment grade index. Right now, they have no reason to sell, unless we fall below investment grade.”
No paradise
Even if the war with Hezbollah turns out not to be as bad as we feared, defense spending is still on track to rise. Doesn’t that deter investors?
“There are permanent things that are known and will be with us in the coming years. Defense spending, arms purchases – but there is also help from the United States through its grant package. Defense spending will go up regardless of the war. They talked about the defense budget going up, and it will go up over Accounting for the civil services that everyone uses, whether education, health or social care services, taxes will rise, most likely including value-added tax.
“In the real economy, war would not be a paradise. It would be difficult. This could have consequences for corporate profitability, all the way back to effects on the stock market. But the sooner the war ends, the sooner it will happen.” To lower interest rates at the moment, the Bank of Israel interest rate is stable. interest rate.
“But assuming that the war does not last longer, and Iran does not enter the conflict, the economy will face difficult challenges in the coming years, but the interest rate in such a situation will fall. This will make things easier for us.” Overall, a quick end to the war will not eliminate the need for a higher defense budget, because the need toward Iran will remain, but it will take possible steps that will allow Iran to act. The economy to gradually recover could be a boom in the stock market, not in the real economy.
When will Israel’s credit rating rise again?
“Moody’s has lowered the credit rating. The other two agencies have not done so yet. Their ratings for Israel are higher. Moody’s justifies the double downgrade for two reasons. The first is the geopolitical situation, and Moody’s does not know any better.” Everyone else when the war is over. But if the war ended tomorrow, Moody’s would lose the basis of its argument, even if it were true that defense spending would remain high.
“The second argument is the problematic behavior of the Ministry of Finance. Moody’s does not believe the ministry’s forecast for the fiscal deficit for this year. It also does not believe the 4% forecast for the deficit in 2025, and is talking about a 6% deficit, so it depends on how the government behaves.”
“This will be the key to the market behavior in Israeli government bonds, whether the budget is managed responsibly, and whether the budget can be passed with spending cuts, which is by no means certain. If the government’s behavior from now on will be correct “. The agency will decline if its behavior continues to cause problems – and what is clear from Moody’s report is that the agency has lost confidence in the decision makers at the Ministry of Finance and does not trust them. Anymore – they will not hesitate to turn the negative outlook into a downgrade, and then we will be in a very problematic scenario.”
What will happen if Moody’s downgrades the rating again?
“Such a cut would trigger a rise in yields that would push short-term interest rates higher. This is not a scenario anyone wants to be in. Even if the war ends within a short time, the next step by Moody’s is It will not be to raise the credit rating, it will most likely be to cancel the rating outlook from negative and change it to stable and after that, they will consider upgrading the rating quickly, even if they think it should be raised, they will not raise the rating all at once, they will wait longer.
Published by Globes, Israel Business News – en.globes.co.il – on September 30, 2024.
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