Once upon a time, in the distant 1990s, the Tel Aviv Stock Exchange was the people’s barometer for the economic climate. Israelis invested their money, energy and attention.
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But that was two decades ago. In recent years the TASE seems to be in a steady decline, and with the exception of a handful of professionals, few are interested in it. The market has been generating low returns for years.
This year hasn’t provided a turning point either. So far in 2016 the TA-25 Index is down 8.5%, and last week it fell below 1,400 points, a level that hasn’t been seen since September 2014. The TA-100, which has dropped 7.8% this year, fell to 1,210 points – a two-and-a-half-year low.
From a more distant perspective, the picture is very gloomy. Between 2006 and 2016, the TA-25 returned 57%, an annual average of 4.6%. In other words, every 100 shekels ($25.83) invested in 2006 became 157 shekels a decade later.
For the TA-100 the number is 34%, for an annual return of 3%. That’s 134 shekels for every 100 shekels invested – before tax.
These are very low returns. In effect, an investment in bonds in those 10 years yielded a far better return.
The previous decade and a half was a better time. For example, between 1992 and 2006, the same indexes yielded an annual nominal return of 14% to 15% – three and four times better than in the past decade. Even if we adjust for inflation – which was relatively high in 1992-2006 compared to the past decade – the return was 11% to 12%.
Someone who invested in the S&P Index in the same period reaped an average annual return of about 7%. That’s too isn’t high compared to the past, but it’s still far better than the TASE. And it was achieved despite the huge credit and real estate crisis of 2008-09 and the severe recession in the United States that followed.
The poor TASE returns provide an explanation for the symptoms we’re suffering, including the delisting of companies and few new companies taking their place. Meanwhile, foreign investors’ share in the market has been declining.
So what caused the huge gap between TASE returns in 2006-2016 compared to 1992-2006?
“One of the main factors affecting returns was the crisis of 2008, which sent the indexes down 50% to 60%," says Guy Rosen, an investment manager at Migdal Capital Markets, which manages about 35 billion shekels.
“You also have to remember that 2006 was a year when the market was high following four years of strong increases after a low point in 2002. Average returns have been relatively low, because returns are also a matter of timing and depend on the point in time you’re measuring from.”
Along with the global crisis of 2008-09, the Israeli economy had problems of its own.
“In the 1990s, and during the first half of 2000, growth in the economy was far higher than in the past decade,” says Rafi Gozlan, chief economist at the IBI investment house. “The main thing that has changed is the country’s interest-rate environment. Real interest rates are lower.”
Those were the days
In any case, the 1990s are when the Israeli economy made its quantum leap.
“Those were years when Israel was positively and strongly affected by the immigration wave from Russia. At the same time, many reforms were instituted that led to an opening of the economy to the world. But the past decade presents a more complex picture,” Gozlan says.
“Global growth is moderate and reforms in the economy are slow or nonexistent. Although low interest rates support the economy, it’s not limited to Israel. And the fact that the shekel has strengthened against the currency basket and the dollar has apparently contributed to the lackluster performances.”
Rosen also notes another key factor weighing on the stock market in recent years: the disappearance of the large business groups, most of which were involved in real estate.
“The classic example is Africa Israel,” Rosen says. “This is a huge company that’s now undergoing a second debt settlement after losing most of its value.”
Another industry rattled is retail and cellular services. This group includes supermarket chains Super-Sol and Mega (Alon Blue Square), as well as the communications companies Cellcom, Partner and to a lesser extent Bezeq. These were firms in relatively protected industries that were opened to competition.
A third industry that has underperformed is finance – the banks and insurance companies. Israeli banks trade today at a very low price-to-book-value ratio of 0.5 to 0.8. In normal times, this number tops 1.
Insurance companies are even worse off. All the large insurance firms – some of which are awaiting buyers from the industry – are trading at a price-to-book-value ratio of only 0.5 to 0.6. And the buyers aren’t coming.
Also, the stock market in the past year has been racked by interesting phenomena both internally and externally.
The first was the growth slowdown in the Chinese economy, which has been deteriorating since last summer. That event has a negative effect on all markets around the world.
The second is the past year’s decline in pharmaceutical stocks after a series of successful years. Since the Tel Aviv indexes are pharmaceutical heavy, they’re particularly taking a beating.
Since early 2016, shares in Teva Pharmaceutical Industries have tumbled about 22%. And that stock accounts for around one-tenth of the market, as does another pharmaceutical company, Perrigo. That stock has dropped 5%.
The newcomer, Mylan, accounts for about 4% of the leading indexes. That stock is down around 22%.
Shining in volatile times
After underperforming for 10 years, can the Israeli market flourish once again? The economists at the investment houses say that after the declines of the past year, the market’s price-to-book ratio isn’t particularly high. In other words, compared to the past, the Israel stock exchange isn’t expensive.
The current price-to-book ratio on the TA-100 is about 1.5, whereas the price-earnings ratio is only about 9.5.
Alex Zabezhinsky, the chief economist of Meitav Dash, which manages 125 billion shekels, says Israel’s banking sector is particularly trading at low prices.
“The underpricing of banks is related to technical issues – restrictions on institutional investors in their exposure to banks,” he says, noting that an institutional investor may not hold a stake above 5% in a bank. “At the moment, the banks are trading very low relative to their equity.”
Zabezhinsky believes that demand for Israeli shares may pick up as Israelis’ pension savings increase.
“Every month a net 20 billion shekels or so is added to pension savings. Part of these savings is sent abroad, and part is awaiting opportunities in the local market,” he says.
“Past events have shown that in periods of volatility the Israeli market usually performs well compared to other markets. Therefore, in today’s volatile environment, the Israeli market should have an advantage.”
Rosen recommends that investors choose sectors that haven’t suffered declines since the start of the year. “Income-generating real estate companies, for example, are interesting and a worthy anchor for a stock portfolio,” he says.
“On the one hand, the real estate companies are benefiting because interest rates are low and that reduces the cost of financing. On the other hand, despite the slowdown in the market, there is still demand for commercial properties.”
Another interesting sector is the cellular industry, he says, adding that “as things look now, competition will be less aggressive, so the shares are likely to climb gradually.”
Gozlan thinks that investors should lower expectations for stock-market returns in the coming years; he expects returns of no more than 5% annually.
“Growth today continues to be moderate, and the low interest rate can’t change the situation. The returns on long-term bonds for 10 or 30 years remain very low – similar to those we saw in the stock market in the past decade,” he says.
“In the present situation, when the alternative in the bond market is more or less zero, it’s hard to expect returns in the stock market, certainly not the kind we saw in the 1990s.
It’s almost as if a miracle is needed.
“Of course, unique processes such as a change in the region’s political map or unusual reforms are likely to change the situation and lead to an increase in growth,” Gozlan says. “And accordingly, they’ll lead to sharper increases in the stock market. But that’s not the situation in Israel today.”
Nor is Zabezhinsky optimistic regarding the coming years. “The stock exchange is a mirror of the economy. If the economy manages to return of growth between 4% and 5%, it will be possible to expect two-digit returns in the stock market.
“At the moment it’s hard for me to see that we’re approaching such growth. So I think stock-market investors should expect relatively moderate returns of 5% to 7% annually.”