The Tel Aviv Stock Exchange is surging once again. Before easing on Wednesday, the main indexes set their latest record highs the day before, when the blue-chip TA-25 crossed 1,700 points for the first time ever, to close at 1,708. The index has risen more than 16% this year.
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Stock indexes remain a barometer for the economy. If indexes are high, the economy is thought to be functioning well; gross domestic product is growing, people are becoming wealthier, companies are investing and living standards are rising.
At least that’s how it goes in theory. In practice, it’s much more complicated. Stock markets may have been providing investors with admirable returns, but the economic data show that Israelis have fewer reasons to celebrate. Only a few feel that their finances have improved significantly this year; more seem to be investing in real estate, not stocks.
So why is the TASE rising? Here are a few theories.
1. Zero interest rates for bonds
One reason for the stock surge may be the Bank of Israel’s extremely low interest rate, now at 0.1%. The low yields on government bonds now range from 3% for shekel-denominated long-term bonds to negative yields on inflation-linked bonds.
Some Israeli investors and traders say these low percentages don’t accurately reflect the risks. Consumer prices rose 0.6% in April, surprisingly high, so some stock-market players expect Israeli inflation to return to normal. But prices actually fell in the first quarter of the year, compared with the government’s annual target of 1% to 3%.
If shekel-denominated bonds don’t provide adequate compensation for the long term, investors will prefer to put their money in the stock market, where prices, even after the big gains so far this year, can still be called reasonable.
2. Stock indexes don’t necessarily overlap with economic glitches
Many companies on the TA-25 are tied to events in overseas markets, not in Israel. For example, the biggest gainer so far this year is drug and diagnostics firm Opko Health. The stock, a very volatile one, has surged 71% this year.
Two other companies that stand out are real estate firms Melisron and the Azrieli Group; their stocks are up 39% and 29% respectively. These two companies are benefiting from low interest rates, too; their profits have climbed while their financial expenses have sunk.
Another standout is Nice Systems, which sells systems to analyze and store digital voice and video data. The company, whose major markets are overseas, has seen its share climb 32% this year. Nice Systems’ rise is linked to the overall gains by the technology sector around the world, especially in the United States.
Shares in flavor and fragrances maker Frutarom have surged 31% this year. The firm, a beneficiary of demand in the global food industry, has grown for years, even when the Israeli economy was going nowhere.
Shares with a closer link to the local economy — such as those for banks, food makers, retailers, supermarket chains and communications companies — have risen much more moderately this year.
The TA-75 index, probably a better representative of the Israeli economy, has risen only 8% this year, half the TA-25’s performance. In fact, over the past 12 months, the TA-75 is down 4%.
Some stocks have been gradually slipping in tandem with their companies’ profits, such as Israel’s largest supermarket chain Super-Sol, cellular providers Cellcom Israel and Partner Communications, and Alon Blue Square, which owns Israel’s second largest supermarket chain, Mega.
3. The economy is solid
The overall economic data aren’t bad. Last week the Central Bureau of Statistics reported that the economy grew at an annual rate of 2.5% in the first quarter. This is lower than forecasts at the beginning of the year, which saw 2015 economic growth at 3.5%. But the latest numbers are still much more impressive than those for Western Europe.
The modest Israeli growth seems to stem from the long election campaign and the two months Prime Minister Benjamin Netanyahu took to form a government, which froze many projects fed by government spending. In comparison, private consumption grew by an annual 5.5% in the first quarter, and the real estate market is also showing signs of renewed strength.
We can also consider Israel's low unemployment good news about the Israeli economy, not to mention the modest national debt and the reined-in budget deficit. And don’t forget that high-tech investments and tax revenues are both rising nicely.
Still, in Netanyahu’s coalition agreements with the parties in his cabinet, many benefits have been promised to the ultra-Orthodox community and the defense sector. This could put further pressure on next year’s state budget. But if the Israeli economy can weather the shocks elsewhere around the world, the TASE could continue climbing for the next few months.
4. Investors smile on right-wing governments
Last week Israel finally received a new government, one that provides very low expectations, at least for now. Many people are wondering how a coalition with a two-seat majority in the Knesset — 61 to 59 MKs — can last for long.
Netanyahu’s previous government combined two new forces — Naftali Bennett’s right-wing Habayit Hayehudi and Yair Lapid’s centrist Yesh Atid. There were high expectations that it would carry out far-reaching reforms that would lower Israel’s cost of living. Most of those expectations are still just that, especially when it comes to soaring housing prices.
But if we put the essential reforms to the side for a moment, stock investors mainly expect governments to maintain budget discipline. Investors want governments to avoid large budget deficits. They don’t want inflation to get out of hand, and they don’t want regulatory moves that cause uncertainty in the industries that form the basis of the economy.
New Finance Minister Moshe Kahlon is expected to work to lower housing prices and increase competition among banks, but stock investors and analysts find it hard to believe he’ll be able to drastically change either industry, especially because the governing coalition’s majority is so narrow.
As a rule, as long as there is no economic crisis, right-wing governments avoid intervening in the markets. Companies fearing that regulation will sting their profits tend to like this, and of course so do shareholders.
We saw an example of this just this week. Bezeq shares jumped when the director general of the Communications Ministry, Avi Berger, was fired. Berger had striven to promote competition in the landline communications market — where Bezeq enjoys high monopolistic profit margins.
5. Records on global stock markets
The Tel Aviv Stock Exchange is always influenced by what happens elsewhere around the world, and elsewhere around the world most stock markets are near record highs, or at least are rising nicely.
This is the case for the Dow Jones Industrial Average, which has been cruising around its record 18,300 points and has risen 11% over the past 12 months. The Nasdaq index, which two months ago set a record and has stabilized above 5,000 points, is conveying optimism too.
European stock indexes, like Britain’s FTSE and Germany’s DAX, are also close to their peaks, despite Europe’s economic sluggishness compared to the United States. Even the Russian stock market has returned to the green this year after its collapse in 2014 — oil prices are recovering and the ruble has strengthened.
Similar to the situation in Israel, stock markets around the world are being fed by the money flowing in because of zero-interest-rate bond markets.
In Europe, where stocks lagged behind their American counterparts for years, the gains have been even greater. As long as the European Central Bank is buying government bonds and flooding the markets with cash, as the Japanese central bank and a few others are doing, stock markets will be among the main beneficiaries.
But for how much longer will it be possible to print money, pour it into the markets and manipulate government-bond levels without a bubble expanding in one asset class or another? It seems only central bank governors have the answers.