The year 2008 was a humbling one for equity analysts. It showed how much they didn't know, quip Alon Glazer and Yuval Ben-Zeev, two of Israel's most seasoned sell-side analysts. Glazer and Ben-Zeev head the research departments at Leader Capital Markets and Clal Finance Batucha, respectively.
What lessons have you learned from 2008?
Ben-Zeev: "I think we learned that investing is a risky business and we don't really know enough. Investors shouldn't accept our conclusions at face value. They have to make their own decisions based on the risk of each investment."
Glazer: "We're learning to be more conservative in pricing risks... We're going back basics: which companies will survive."
You sound as if you trust the managers less.
Glazer: "Managers always broadcast optimism, but it isn't always realistic. Now that times are hard, company managers are actually more open. The crisis has given us an opportunity to obtain a lot of information."
Why didn't we see Sell recommendations from analysts in the past few years?
Ben-Zeev: "There were Sell recommendations, but they were outnumbered by the Buy recommendations, and were therefore less visible."
Glazer: "There aren't many Sell recommendations anywhere in the world, and that's likely to continue."
Do you see opportunities in the market, or are the low prices all too realistic?
Glazer: "The risks haven't passed. As long as the credit crunch continues, and the liquidity crisis and the write-offs caused by toxic assets, I don't think the stock market is particularly attractive. Still, there are opportunities. I think investors need to consider two things: first, that we will continue to see negative events - not all the bad things have surfaced; and second, that we currently have an alternative in the bond market. In many cases, especially concerning financing and real estate, bonds are preferable to shares. Bonds are safer. Even if a company can't repay all its debt, it will repay some. Thus corporate debentures, even at today's prices, may be preferable to shares."
What other bad things could happen?
Glazer: "Many things. The economic situation could worsen further. There's plenty of talk about global recession and a slowdown in Israel, but it could get worse. We haven't seen everything yet. The Madoff swindle is out in the open now, and we could see more similar scandals. We don't know how much the world's banks will ultimately have to write off for investment in toxic assets, which will affect their equities. This year, 2009, will likely be another tough year for Israel's capital market and economy."
Ben-Zeev: "I think that the market considerably underpriced risk until mid-2008, and now risk is overpriced. The markets are pricing for worst-case scenarios. The Madoff affair reminds us that frauds exist, but risk is still overpriced."
Banks, yes. Insurance, no
What do you foresee for the banking and real estate sectors in the coming year? Ben-Zeev sees a dire year for finance-sector companies and banks, mainly because of sharply increasing provisions for doubtful debts as their own clients line up to default. It already began in third quarter, he points out. Right now bank stocks are priced nicely for long-term investment, in his view.
This is where his vision gets interesting: as the worst-case scenarios start to unfold at the macro level, shares will start rebounding.
"Investors should be selective regarding the big holding companies and real estate companies. Some companies will manage to cope with their debt repayment schedules, without giving their bondholders a haircut," he says.
Glazer also sees a weak year for banks, and predicts huge write-offs among real estate companies as the value of past investments shrink.
"For 2009 to be a good year, fortunes would have to reverse big-time and fast," he says. "As for investments in shares, I think the banks are the better choice. I believe prices are close to rock bottom, and that if things get any worse, the government will help the banks before they need to be nationalized. The outlook for real estate and insurance shares is less optimistic."
All in all the analysts remain positive.
Glazer: "The economic world is not finished. The markets will recover. The actions of western governments and the Israeli government will help, and will bolster the markets. When the light begins to shine the end of the tunnel, the markets will start climbing. I cannot say when that will be, but I think we can start being a little less defensive in our investments, starting with relatively safe instruments such as bank shares."
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