TASE Highs, Trend or Bubble?

The Tel Aviv Stock Exchange opened this week at a near-record high. Last week some believed it would surpass the 1,230-point mark, but investors apparently got cold feet, fearing the euphoria was unjustified.

Their apprehension could be due to the flood of new stock issues or the fact that most companies feel they can raise money on the bourse without a solid foundation. Or perhaps due to the recent success of the local oil-exploration companies, which also do not have full financial backing. Or maybe simply due to the continuous upward momentum of the past two weeks.

With the start of a new week, however, a round of conversations with investment managers in Tel Aviv reveals that most are optimistic. For example, Shlomo Maoz, chief economist for Excellence Investments sees no reason for share prices to stop rising.

"The gains we see now in the markets will continue until the end of the second quarter of 2010," Maoz predicts. "These days there is no alternative to shares and the name of the game is the 'great escape' from cash. Interest rates worldwide are low - and are not expected to rise soon. Even in Israel there is no reason to raise the rate. There are no inflationary pressures, and the Israeli central bank governor cannot open a gap relative to other countries.

"Low interest rates and high profitability do not leave much choice apart from shares," continues Maoz. "Still, the money coming in is mainly from institutional investors. The public isn't fully involved yet; only here or there, in the periphery."

Maoz does not believe current share price levels are a sign of a bubble: "The profit multiple of the share price indexes is still lower than that of the short-term government loans, which is 50. This is an important reference point today. It may correct itself toward the end of the quarter."

As for bonds, he says there is no clear, across-the-board direction. "This is one of the reasons for the constant momentum in the stock market, where the picture is simpler," he says, adding that he thinks local investment managers are mistaken in focusing on the Israeli market, to avoid the possible effects of the rising tension surrounding the Iranian threat: "[They] need to get out into the world. Conditions in many countries are quite attractive. The United States is very cheap."

"Most of the gains in the stock market in 2009 were a correction from the slump in 2008," observes Adi Guberman, managing director of Clal Finance Mutual Funds. "After all, the contraction of the market in Israel was excessive relative to the overall economic situation, which turned out to have been only moderately affected. Even after the correction of the effects of the global economic crisis, which brought the market back to its level two years ago, there is room for share prices to rise, although at a more moderate rate than during 2009.

"I believe that over the next five years, the bourse will provide up to five times the yield on government bonds. If the forecasts of the profitability of Israeli companies are accurate, there is no doubt that investing in bonds is preferable to investments in alternative assets."

Ron Eichel, chief strategist at Meitav, does not see the crossing of the 1,200 point mark as signifying anything.

"The Tel Aviv stock market is not afraid," says Eichel. "We expect turnover to increase over the coming years, so we favor share-oriented investments. I do not see any bubble characteristics in the market. The financial reports are expected to be good in 2010, and the macro environment is good, too: Interest rates are low, inflation is being held in check and unemployment continues to decline, thus an additional 10% yield in the leading indexes is reasonable."

Eichel recommends investing in two main types of companies: those with growth potential and low debt ratio, like some technology firms that will be less affected if the economic environment worsens, and companies that generate continuous dividends.

"Such companies," he explains, "despite their small growth potential, are characterized by an element of certainty in uncertain times. Even if global economic growth does not pick up until 2011, Israel can make it through 2010 with higher than 3% growth, as long as the U.S. does not sink back into a recession. In any event, we believe the world will continue on its recovery track."

Regarding the bond market, Eichel figures that government bonds will yield 5% at best, and corporate bonds, an additional 2%. He comments that recently, he has noticed investment houses preparing themselves for an escalation in the conflict with Iran.

"They are increasing the foreign shares component in their portfolios," says Eichel, "aiming for better yields in order to diversify [the risk factor]. We have also taken this into consideration and are maintaining a large foreign currency component, mainly by investing in bonds abroad."

Even though this strategy has led to more moderate yields due to the strengthening of the shekel, "this is the price one has to pay for protection."

"Share prices are not high," stresses Rami Dror, CEO of Hadas Arazim Investment House. He believes the bourse's upward momentum these days is backed by genuine growth in the gas, finance and communications sectors, and from capital streaming into the market thanks to the low interest rates.

"Investors in the communications sector are anticipating big dividends, so share prices have risen, but are still not high. Interest is still low and is expected to stay low, as long as inflation stays under control. When interest rates are low, the value of companies is higher, when calculated as a derivative of their cash flow," explains Dror.

"There is too much money in the market," says Eli Zahor, CEO of Barometer Investment Management. "The local market's success relative to the rest of the world prompts people to keep their investments at home." He believes the share prices are indicative of a bubble.

"It's not a crazy bubble," says Zahor, "but share prices are high. Bond prices are also high in some places. Now is a good time to reduce positions.

"In some instance, the prices do not reflect the risk. There is a big shortage of bonds in the market. We are back where we were in mid-2008, and there was criticism back then that investment managers were raising money at exaggerated prices," Zahor notes.

"Some of that is happening again, as if we haven't learned a thing. Sometimes investment managers are affected by the herd mentality - taking higher risks when they shouldn't, and decreasing risks unnecessarily. When money talks, everyone listens," Zahor said.