Tent protests turned 5772 into year of the bear
For those who exploited their customers, the market was merciless. Too bad they took our pensions down with them
Last Rosh Hashanah was a festive one for the residents of Tel Aviv's ritzy Rothschild Boulevard.
After three months of having a vast tent camp running the length of the street, the protesters had packed up and gone home. Finally the residents' lives could go back to normal.
But looking back on how the capital markets fared over the past Jewish year of 5772, it seems the protest movement left a lasting imprint on asset prices, and not in a good way.
The awakening of the Israeli consumer triggered a chain reaction that reached affected every sector. Enormous sections of Israel's economy had been based on exploiting consumer weakness; they were unprepared for consumers starting to stand their ground.
Supermarket chains, such as Dudi Wiessman's Alon Blue Square and Nochi Dankner's Super-Sol, lost as much as 60% of their market value over the course of Jewish year 5772. Food manufacturers such as Strauss and Osem lost up to 20%.
Not only that: regulators bit down. The communications minister turned the market he oversees on its head, forcing reforms that brought in new players, which in turn decimated the income, and share prices, of the big mobile operators: Ilan Ben-Dov's Partner, Dankner's Cellcom and Shaul Elovitch's Bezeq, each of which lost up to half it market value.
And then there was the finance sector.
The threat of the economic concentration committee's recommendations, coupled with the uncertainty in global markets, wiped 20% off the value of the index of insurance shares.
Then the losses struck the holding companies that own these battered businesses. All the publicly-traded holding companies lost value this year, but among the hardest hit was Dankner's IDB group, two of whose companies - IDB Holdings and Discount Investments - lost 70% of their value over the last year.
The implosion wasn't confined to share prices. Bonds issued by these groups tanked.
Thus, in 5772, while the Israeli economy continued to grow, the Tel Aviv Stock Exchange went in another direction entirely.
All in all, the public racked up losses worth billions during 5772. Our provident funds presented average returns of only 2.8%. Once you factor in inflation, that may even turn out to be a loss in real terms.
In comparison, the Dow Jones Industrial Average gained 20% in the past 12 months and Germany's DAX index gained 36%.
Investors want foreign markets
This year of mediocre returns comes after Israel joined the OECD, the club of developed nations, which created the impression that we'd gone up a league but failed to succeed there. "The situation in Israel's capital market stems from investors' preference to put their money abroad," said Shachar Rejwan, head of corporate bonds at the Analyst investment house. "Local investors prefer to invest in Apple, far away from the bad local business environment and all the regulations. There currently isn't any money earmarked for the local market."
To understand the depth of the problem facing our pensions, we need to look a little farther back. Four years ago, in November 2008, the benchmark Tel Aviv-25 Index slumped to a low of 630 points, after losing nearly 50% of its value over a span of a few months. This wasn't due to a financial crisis in Israel, but rather in the global markets, primarily in the United States. That month Barack Obama was elected U.S. president, and the launch of financial bailouts in the United States and Europe shortly sent the markets into an unprecedented rally, making 2009 one of the best ever for the world's financial markets.
When 2009 ended, and the market animals began asking what was in store, some began suggesting that we weren't quite out of the swamp, and that we were coming upon several bad years - years of 0% returns as markets continued to clean out the filth that had caused the crisis, as companies and even countries slowly and painfully settled their balance sheets and scaled back their loans. Those loans, which had fueled the intense economic growth of the previous decade, had been disproportionately larger than economic parameters could justify.
Back to Tel Aviv of 2012: It seems that anyone who forecast years of zero returns was right. Since the beginning of 2010, the Tel Aviv-25 has returned nearly 0%. The ongoing uncertainty regarding the financial stability of the major euro bloc nations hasn't been resolved, and the world isn't managing to get past the crisis atmosphere. And all of our pensions are suffering.
But 2012 has had some good features, too, particularly for one industry: Israel's technology shares, as represented by the BlueTech-50 Index, gained 35%. Shares of companies including Babylon, Mellanox Technologies and Allot Communications soared by tens or even hundreds of percent, turning high-tech into the local stock exchange's steam engine. The year 5772 belonged to this sector, selling Israeli technological know-how overseas.
Following high-tech were the other manufacturing sectors, those that don't rely on a captive audience. The index of industry shares gained 10%, the chemicals shares also gained 10% and the electronics index gained 30%. The combination of these stellar performers coupled with a particularly bad year for shares in general meant the local index of major industrials became particularly concentrated - now, the six companies with the largest market caps account for 60% of this index's weight. "All the technology shares that gained over the past years are niche companies that did well with good management. What's unfortunate is that after these shares' dramatic increases, they're unlikely to continue gaining at this pace," said Eran Yaakobi, VP-research at DS Investment House. "These shares are essentially options based on the global economy. Their value is dependent on whether we'll see a recovery that keeps demand for their products strong. Alternately, if the global economy suffers they'll take a hit."
Gov't bonds rose
It's not just the technology shares' dependence on the global economy that is raising investors' concerns regarding next year. Another sector that posted impressive gains over the past year is also looking at an uncertain future, and this sector, too, plays an important role in our pension portfolios. This would be government bonds; indexes tracking government bonds gained 6% to 7% this years, and the government, as well as government-backed companies such as the Israel Electric Corporation and the banks, ruled last year's market for bond placements.
The demand for government bonds stemmed from fear regarding the future of the capital markets and the euro bloc, sending our money managers running for safe havens. Yet the gains by these securities don't leave them much room for further increases, and are already promising us returns close to zero - if not negative - over the coming years.
So what can we expect from 5773? Most likely not what we saw in 5772. As opposed to investing in last year's winners, investors would do well to identify the new year's growth engines. For instance, communications shares - which took one of the worst beatings over the past year - may yet surprise this year and post gains, as they have done over the past few months. "The communications shares have been rebounding from catastrophe for the past few weeks," stated Yaakobi. "This is because investors believe the biggest regulatory changes are behind us, most of the uncertainty facing the sector has been resolved and the amount of competition is stabilizing."
Rejwan says it may be a good year for corporate bonds. "The psychological effect from IDB's situation is immense, and at the moment it seems like the entire bond market is motivated by fear. Corporate bond prices are currently about 10% too cheap. Most of the bad news has probably been factored into prices already, and now we can start looking forward."
Anyone concerned for our pensions needs to recognize that this year's power players most likely will be entirely different from last years', and to avoid the herd mentality that often characterizes investment managers, as we are likely to soon face a period of opportunity. "There's no question that the world is a more real place, as we observed over the past five years," said Yair Lapidot, CEO of the Yelin Lapidot Investment House. "The peak prices of five years ago were one big illusion. The global crisis is real, and there's no hocus pocus, but if I look at current prices, they're below reasonable economic values as well as most estimates of companies' valuations.
"The problem is that unfortunately, most of the Israeli public graduates high school without minimal knowledge about investing and saving," Lapidot continued. "In Israel, people still like to invest in shares that have already increased and to sell shares that have already lost value. That's our basic behavioral problem - things should be the other way around. Anyone who wants to retire with money should be doing things the other way around."
To go back to the social protest movement, which overshadowed the stock exchange over the past year, we should all take another look at those companies that learned the lessons of the consumer uprising and look for opportunities in their shares. We should also look at sectors affected by the increased competition in various markets, and consider them for our portfolio as well.