Negative sentiment over judicial impact drives market underperformance, TASE warns

Stock exchange head blames political uncertainty for downward investment trends; Israeli public pulls NIS 21.5b from funds tracking local stocks and bonds

Sharon Wrobel is a tech reporter for The Times of Israel.

A stock market ticker screen in the empty lobby of the Tel Aviv Stock Exchange, on March 15, 2020. (Flash90/File)
A stock market ticker screen in the empty lobby of the Tel Aviv Stock Exchange, on March 15, 2020. (Flash90/File)

Trading on the Tel Aviv Stock Exchange has been “negatively” affected by the sentiment of uncertainty and fear among investors over the impact of the planned judicial overhaul on Israel’s economy, the country’s bourse warned.

Speaking at a presentation of the TASE’s second-quarter financial results, its chief executive Ittai Ben-Zeev, cautioned Wednesday that as a result of the uncertainty surrounding the proposed judicial reform and the global rise in interest rates and inflation, the exchange’s leading indices continued to underperform in comparison to global stock indices, initial public offerings (IPOs) have come to a standstill and capital raising by public companies significantly dropped this year.

“For years we have strived for the stock market to reflect Israel’s economic success and are working to realize Israel’s potential to become a global financial center, attracting investments from all over the world. But, the underperformance of the local capital market since the beginning of the year, which perhaps reflects better than any other indicator of investor expectations and negative sentiment regarding the local economy, suggests that Israel is moving further and further away from the global markets, which are already on a recovery trend,” said Ben-Zeev. “The Israeli government must take responsibility and listen to the warnings by international bodies.”

The warnings “keep piling up and point to significant risks that can damage Israel’s economic strength, which in turn will harm the assets and quality of life of all Israeli citizens,” he cautioned, while urging the government to take action to restore trust, stability and certainty to the local capital market.

At the end of July Ben-Zeev alerted the government that it could face a downgrade of the country’s economy by credit-rating agencies and a financial crisis if it doesn’t come to its senses. The head of stock exchange’s appeal came in response to Moody’s Investors Service warning about “negative consequences” and “significant risk” for Israel’s economy following the passage of the first bill of the government’s contested judicial overhaul.

Ben-Zeev’s reiterated appeal comes as lawmakers advancing the proposed changes to the country’s judicial system without broad consensus have been ignoring numerous warnings in recent months by credit-rating agencies, the Bank of Israel governor, world-leading economists and serial tech investors about the irreversible economic and social damage that is likely to be caused.

TASE CEO Ittai Ben-Zeev at a press conference in Tel Aviv, December 22, 2020 (YouTube screenshot)

In the second quarter of the year, the TA-35 stock index of blue-chip companies dropped 7.5%, the benchmark TA-125 index fell 9.6% and the TA-90 index, which tracks the shares with the highest capitalization not included in the TA-35 index, was down 8.4% compared with an advance of more than 8% in the S&P 500 index in the US. In the first half of the year, local stock indices declined by 2% to 3%, while the S&P 500 jumped almost 20%.

Political uncertainty around the government’s proposed judicial overhaul has seen the shekel already weakening by about 5% relative to the US dollar and 7% relative to the euro in the first half of the year, the bourse data showed.

In its financial report, the TASE warned that the “controversy surrounding the proposed changes in the legal system, as long as it continues, let alone if it increases, could lead to further devaluation of the shekel, damages to exports, inflationary pressures, further interest rate increases by the Bank of Israel, a crisis in the mortgage industry and a decrease in local investments — both due to the reluctance of foreign investors with an emphasis on the high-tech industry and due to the diversion of investments of local investors abroad.”

“In addition, this may lead to a lowering of the credit rating of the State of Israel or the forecast for the credit rating by the international rating agencies and an increase in the Israel’s risk premium, at least, in the short term,” the TASE said.

Amid concern that the government’s plans to weaken the judiciary will hamper economic growth and trigger capital outflows, the Israeli public pulled money from mutual funds that invest in local stocks and bonds for financial funds, basket funds and open-end funds that invest in overseas securities and debt.

In the first half of the year, the public pulled about NIS 17.7 billion ($4.8 billion) in funds that invest in local bonds on the Tel Aviv Stock Exchange following redemptions of about NIS 24.6 billion in 2022, according to the TASE data. In addition, NIS 3.8 billion were diverted from funds tracking local stocks and indices after about NIS 0.8 billion were poured into these funds during 2022.

Tech workers protest Israel’s right-wing government in Tel Aviv, on January 24, 2023. The Hebrew on the blue sign reads: ‘No democracy, no high tech; and the yellow sign reads: “No to the coup d’etat.’ (AP/ Maya Alleruzzo)

Against this, funds that track international bond and stock indices, mainly the S&P 500 and the Nasdaq-100, saw an inflow of NIS 5 billion during the first half of the year following an outflow of NIS 3.2 billion from these funds during 2022.

Additionally, the inflow into money market funds accelerated following the trend that began in May 2022 as interest rates continued to rise. In the first six months of the year, the public poured NIS 28.7 billion into the short-term investment funds, following an inflow of NIS 32.5 billion in the months of May-December 2022.

At the same time, the TASE noted significant growth in the trading volumes of government bonds and T-bills. Net purchases of government bonds by foreign investors on TASE totaled NIS 20 billion, from January through May 2023, compared to net sales of NIS 1 billion for the whole of 2022, according to the Bank of Israel.

Furthermore, in the first half of 2023, the business sector raised close to NIS 47 billion through offerings and private placements of bonds to institutional investors and the public, similar to the amount raised during the same period in 2022, the bourse said.

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