2015: The Year of Zero for Israel’s Investors

Stock markets at home and abroad performed poorly and there were no alternative opportunities in bonds, forex or commodities. Next year looks more of the same.

Yael Engelhart

Barring a dramatic change over the next week, 2015 will leave investors in Israeli securities with a return around zero. Israeli financial markets have disappointed this year, with stocks doing poorly abroad as well.

The Tel Aviv Stock Exchange’s TA-100 index reached a peak in August of 1,503 points, a 16% rise from the start of the year. But since then it has been all downhill; as of Tuesday the index was at 1,287, down 0.1% year to date.

On the other hand, anyone who invested overseas didn’t have much to show for it. Wall Street’s S&P 500 Index has lost more than 2% in shekel terms since the start of the year, and the Dow Jones about 4%. The Nasdaq, which is more high-tech focused, has risen close to 4%, but this is a tepid performance measured against its higher risk and volatility.

Israelis who invested in the Euro Stoxx 50 Index enjoyed a nominal return of about 3.5% since the start of the year, but that was more than eaten up by the 11% drop in the value of the euro against the shekel. In shekel terms, these investors lost about 5.5%.

Even emerging markets, the ostensible engines of global growth, ended up a deep disappointment. Share indexes in China, Brazil, Turkey and Russia dropped significantly in the first half of the year. To make matters worse, their currencies lost value against the dollar and the shekel.

Anyone who invested in emerging markets through exchange-traded notes on the Tel Aviv Stock Exchange, which are tied to the MSCI indexes, suffered a loss of about 16.5%.

In previous years, Israeli investors could reap some joy from their bond holdings. But in 2015 yields in most of the bond market hovered around zero. That’s no surprise since the Bank of Israel rate has been close to zero since August 2014 and the yields on the highest-rated bonds range between zero and 2%.

The TASE’s Tel-Bond 60 Index, which includes the market’s highest-rated bonds, is down about 0.4% from the start of the year. The Government Bond Index for medium-term debt of two to five years has fallen 1.2%, while the Inflation-Linked Bonds Index, which includes government and corporate debt, is down 0.4%.

The best returns were from the Government’s Shekel Bond Index, which have risen about 2.5% this year. Most of the bonds in the index are long bonds, which benefited from the drop in the consumer price index this year.

The foreign currency and commodities markets also didn’t bring investors joy. The dollar kept roughly to its level against the shekel in 2015 while the euro lost 11% against the currency. Commodities were lower all around, most notably oil.

The one place where investors are ahead for the year is medium- and small-capitalization stocks. The TA Midcap 50 Index has generated a 22% return this year, but there’s little cause for celebration because it makes up only a small part of most investors’ portfolios.

One thing investors can look forward to is the "window dressing" that typically gives a boost to financial markets in the final two weeks of the year. Also known as the Santa Claus rally, it could save the portfolios of the investing public. But unless that happens in a big way, 2015 will be remembered as the year returns were in the best case a meager 1%. For many, they will be negative.

The bad news only heralds more of the same. Yields on Israeli government bonds, like those in most places around the world, are at historical lows. The odds of capital gains on bonds in the coming years aren’t very good.

Share markets in most of the Western world have pulled back from their record highs of last summer, but valuations aren’t low. In many sectors, especially high-tech, share prices are actually quite high.

In other sectors, prices are more reasonable relative to the past, but that comparison might not be relevant. It’s much more challenging for a company to show real growth in sales and profits in an economy growing less than 2% a year than in one growing 2% to 4%. But 2% has been the norm of late.

As long as growth in the United States, Europe and Japan doesn’t move up a gear, corporate profit growth is going to be tepid – and profit growth is what drives markets. The U.S. Federal Reserve’s first interest rate rise in seven years will weigh on markets.

Factor in slumping oil prices and the slowdown in China and Russia, and 2016 could be a year of zero, too.