Investing During Wartime

Four questions, and answers, for investors rattled by the winds of war.

Can small investors do anything to protect themselves?

"I doubt the small investor can do much of anything," said Dudi Reznik, fixed-income research director at Leumi Capital Markets. "Making decisions at a time like this is a recipe for losses. During the first days of the Second Lebanon War [in 2006] there were big drops, but everything returned to normal pretty quickly. The market tracked economic developments, not geopolitical ones."

Yaniv Hevron, chief economist at Excellence Investment House, agreed. "All a small investor can do is to increase his cash holdings. While prices are falling, there isn’t much you can do to hedge against it. If the drops are also occurring overseas, anyone moving their investments abroad will also suffer."

Are institutional investors taking steps to hedge their investments?

Reznik said some institutions are presumably buying dollars, which explains why the U.S. currency has strengthened in the last two days. "In the bond market I've been seeing thin trading – sharp drops but not big volume. There aren't any institutions dumping securities, and the foreign investors are long gone."

"Hedging investment portfolio is done by reweighting to overseas," said Yair Shani, chief investments manager at IBI Mutual Funds. "Most of the time there is a correlation between the Israeli market and markets overseas. But you need to pay attention to the fact that today there is a negative correlation with the U.S bond market. In Israel, we've been seeing rising yields while in the United States we've been seeing them fall. The the fact that entails foreign currency exposure increases the hedging element."

Will the Tel Aviv Stock Exchange close if there is a missile attack on Israel?

"We're talking about a very unlikely scenario," said Reznik. "Even when rockets fell on Tel Aviv during Operation Pillar of Defense [the Israeli operation against the Hamas-ruled Gaza Strip last year] the bourse didn't close for a minute. Added Hevron: "The stock exchange doesn't close for geopolitical events."

Does war present an opportunity to buy in the dip?

"It certainly does, especially in the TA-25 index" said Shani. "The index hasn't participated in the global stock market rally and there are shares like banks and communications that are worth buying today. I believe that the corporate fixed-income market is starting to exhibit buying opportunities. I wouldn’t run today and phone in buy orders immediately because we're likely to see a few more days of declines."

"You can buy government bonds for medium-term maturities because the interest rate environment continues to be low," said Reznik. "On the other hand, at these levels there’s is an opportunity to sell the dollar. You should keep in mind that the corporate bond market has had a pretty good run higher over the past year and it's not right now worthwhile buying corporate debt."

Reuters