Yaniv Pegut, globes.co.il.
The Bank of Israel estimates that the interest rate in the Israeli economy will remain unchanged in the coming year and may soon fall, even after the Central Bank has recently seen measured interest rate hikes. In this reality, the fixed income market embodies expectations of a reduction in interest rates, which has thus become the main monetary scenario.
The main reason that led the Bank of Israel to carry out the fastest monetary plaque-pluck we have seen in Israel in recent years is the increasing global risks to the global economy. This comes as a result of the disgrace in the US-China trade war and the possibility that the UK and the EU face barracks.
It is doubtful whether the substantial moderation of these threats in recent days will prompt the Bank of Israel to update its current softened monetary tone again, as the Bank has for many years controlled the perception that the depreciation of the shekel is sanctifying all measures. As a result, monetary policy is enslaved for this purpose, and the foreign exchange reserves are stacked. Governor Amir Yaron, who seemed to lead to a more balanced position, aligned himself with his predecessors on this issue.
The strength of the shekel , as reflected in a sharp 9% annual increase against trade currencies, is the central bank's big headache. Anyone who has a good eye on his head understands that the sharp increase in local currency is no coincidence, and he relies on real economic forces.
The Governor must be under pressure to execute Hocus-Focus foreign exchange and to weaken the shekel by cutting sharp interest rates, buying large-scale foreign exchange or by pulling out any other rabbit to do the "desired job", which is the shekel depreciation. This is at the same time as the serious side effects of this policy we will all face in the years to come.
If the interest rate in the domestic economy does indeed fall below zero, as the bond market contract and the central bank Governor signal, we are expected to intensify long-term economic damage and thus it was right for the Bank of Israel to leave the negative interest option as a last resort. Negative interest rates are expected to further inflate residential and residential real estate prices in Israel and introduce additional hot air into the domestic bond market.
The natural increase in the Israeli population, alongside the interest rate horizon and the aggravated supply problem as a result of stagnation in government programs, lead me to the obvious conclusion that housing prices are likely to creep up again and keep the younger generation from being able to buy an apartment.
The side effect of the zero interest rate, and the obvious signs of further monetary easing, will also not undermine the domestic yielding real estate market, which can already be seen as clear buds of 5% low-yield transactions whose economic rationale is based on the monetary horizon and lack of investment alternatives. Attractiveness in the local bond market.
Bonds are no longer a solid investment
The sovereign bond market traded with zero yields pulls down the corporate bond yields, which is an acceptable investment alternative to the sovereign debt. The Israeli public is invested far above its throats in corporate debt, which is priced as risk-free, at the same time as many debt raisers designate borrowing funds for risky entrepreneurial projects so that bond funds are used as equity in these projects.
In the face of the Bank of Israel's eyes, and to a large extent with its encouragement, more and more billions of shekels of the general public are invested in long-term bonds bearing zero or negative yields. In the short term everyone enjoys the celebration and getting used to the new normality, but in the long-term view the current situation looks very dangerous. The reality today in the corporate debt market is that investors carry most of the business risk without material rewards, and for most of the absurdity the situation is only expected to be reduced in the near future.
The conventional view that investment in bonds is a solid investment while investing in stocks is a speculative investment does not hold water these days. This is when, in my understanding, investing in the stock market is preferable to the chance-risk mix over investment in the bond market.
In this context, I will cite as many examples the investment in bank shares in relation to their hybrid bonds. While the banks 'Coco (COCO) instruments have a real return of around 1%, then the same banks' shares are trading at a capital multiplier of 1, producing a return on equity of about 10% and dividing about 4% to 5% as a dividend. Tell you which investment is more attractive?
In reality, the obvious investment decision is to gradually reduce exposure to ultra-long and corporate bonds, even at the cost of giving up another rally in the debt market as a result of additional monetary incentives and to moderately increase equity exposure, especially in portfolios with a minimal stock component.
The writer is Ayalon Beit Investment's chief strategist.