Funny how muted the reaction was when the Tel Aviv Stock Exchange's benchmark index, the TA-25, broke its all-time record high November 20.
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Shmuel Hauser, the Securities Authority chairman who has been highly critical of the TASE's management, didn't call up Yossi Beinart, the newly appointed CEO of the TASE, to congratulate him. Finance Minister Yair Lapid didn't hold it up as an example of the bounties he has bestowed on the middle class.
Even in stock market circles, there was little confetti flying. The consensus was, no, it's not a bubble and, yes, share prices will continue rising but - all in all - it's no big deal.
To an extent, the reaction is perfectly reasonable. Most of the world's stock markets have been trading at record highs for quite a while. Even after the TA-25 breached its old record from 2011 and just kept going, its return this year is less than 14%, compared with a 26% gain for the Standard & Poor's 500, 22% for Germany's DAX and 50% Japan's Nikkei.
Emerging market stocks have not performed well, but since MSCI, a company that benchmarks global securities markets for investors, upgraded the TASE from an emerging market three years ago to a developed market, its real competition is New York and London, not Beijing or Kuala Lumpur.
Moreover, trading on the TASE is only fraction of what it was in the glory days of 2007, 2008 and 2010, when average turnover of shares and convertibles far exceeded NIS 2 billion a day. Although it has picked up a little bit in recent weeks, the daily average this year is NIS just 1.1 billion. More companies are delisting from the exchange than are floating on it. One of the biggest, Israel Chemicals, is hedging its bets by dual-listing its shares overseas.
Clearly, the foreign investors who fled after the TASE was declared a developed market, have yet to come back.
It's all about the alternatives
What has been driving the Israeli stock market higher is that investors have no better place to put their money.
The Bank of Israel has cut its base lending rate from a high of 3.5% at the end of 2011 to just 1% today, denuding bank deposits and other interest-bearing investments of any returns. Government bonds and corporate bonds were the initially beneficiaries, but more recently investors have moved into stocks.
Although less extreme, Israel is following the same pattern as the United States and elsewhere in the developed world, where even lower interest rates buttressed by extensive bond-buying on the part of central banks have created a massive stock market rally.
Did anyone say "bubble?" Corporate profits, which is the best guide for stock market performance, are growing, and the consensus sees their climbing 10% annually over the next two years, all of which signals more gains for share prices. Moreover, the average price-to-earnings ratio for stocks traded on the S&P 500 is a little above 15 time projected 2014 earnings, which isn't much higher than historical average, according to a recent Goldman Sachs analysis.
Earning more for all the wrong reasons
But earnings are rising because companies are cutting costs and hoarding cash, not because business is good.
U.S. economic growth is likely to be a tepid 1.7% this year, and wages are stagnant and unemployment high, according to the Organization for Economic Cooperation and Development.
The OECD predicts that growth will pick up to 2.9% in 2014 and 3.4% in 2015, but there's no sign that the recovery is spreading beyond the proverbial 1% of the population. That's not encouraging for profits or share prices in the longer run.
Interestingly, Goldman says that even as it forecasts another year of gains for the S&P-500, it sees a 67% probability of a 10% drop at some point in 2014.
In Israel, the situation is less black and white. The Bank of Israel has been far less palsy-walsy to stock market investors than the U.S. Federal Reserve while the economy has been friendlier. Based on a survey of analysts' forecasts, Ayalon Group estimates that corporate profits for the companies included on theTA-25 index will jump 80% this year, although most of that rise is Teva.
Nevertheless, it means that the index is trading at a mere 11.1 times forecast 2014 earnings. The OECD sees Israeli gross domestic product growing 3.7% this year albeit falling in 2014 and 2015 to 3.4% and 3.5%, respectively. Unemployment is lower than in America and consumers are still spending. On the other hand, the GDP growth rates include a big element of the Tamar gas field, whose bounties do not radiate throughout the economy. Israel's reliance on exports makes companies more reliant on world markets than the strength of the economy at home.
All told, the TA-25's slow progress to new heights suggests that there's no bubble inflating.
Bull market in Tel Aviv? Not so fast
But that doesn't mean that the TASE is in the early stages of a bull market.
In the market's favor, the TASE is cheap on a P/E basis and the growth of the economy and corporate profits could end up surprising everyone on the positive side next year.
Also, the interim nuclear accord between the P5+1 powers and Iran removes a cloud of uncertainty, although this being the Middle East, this could change tomorrow.
But the market may not benefit as much as it should from this because too much of the economy is outside its ambit. That is particularly true of the technology sector, which comprises big foreign companies like Intel, as well as startups and older Israeli companies like Check Point and Amdocs, none of which trade on the TASE.
Unlike middle-class investors in the Anglo-Saxon world, Israelis are not enthusiastic stock market investors to begin with. They tend to come into the market in a big only when they have no better alternative, as they are today, and usually when the opportunity to make real money has already passed. Ironically, the better the economy performs, the more likely they will shun stocks as interest rates rise. But without them and without a big influx of foreign investment, it's hard to see the TASE rally continuing..