The uncertainty in Israel's capital market, which stems in part from political developments over recent weeks, has led some banks to change their investment recommendations for customers. "Globes" has found that investment advisors at some banks have changed their recommendations recently and are now proposing that customers increase their exposure to shares abroad.
For example, investment advisors at Israel Discount Bank (TASE: DSCT) are now proposing customers increase their exposure to shares abroad from an average of 12.5% of their portfolio to 15%. At another bank there is currently a general recommendation to increase exposure to shares abroad at the expense of exposure to shares on the Tel Aviv Stock Exchange (TASE), without specifying in exact percentages.
Among other things, purchasing of shares in foreign currency, mainly in US dollars, protects portfolios when the shekel weakens. Internationally, for example, the exposure to shares abroad is high in any case, so for the time being no official change has been made in recommendations to customers.
It should be stressed that the banks do not currently recommend increasing direct exposure to foreign currency as part of investment portfolios, but to do so through the purchase of shares abroad. At least one of the banks stated that according to their policy, foreign currency exposure should be up to 10%, because foreign exchange is very volatile and the bank wants to minimize exposure to this volatility.
A banking source explained that in the consulting department, "We believe in diversification and diversifying in order to be prepared for any scenario, whether it is diversifying currencies, sectors, countries, and more." According to the source, in a solid Israeli portfolio the recommended exposure to foreign exchange is 10%-15%, while in a balanced portfolio it can be higher, between 15% and 25%.
Israelis are converting shekels to foreign currency
The uncertainty being referred to by the banks is due, among other things, to the changes in the legal system planned by the government, some of which have already passed the first reading in the Knesset, following which the shekel weakened against the US dollar the dollar by more than 2%. Since the start of February, the shekel has weakened by nearly 6% against the dollar.
Even before this week's volatility, many Israelis had already begun converting shekels into foreign currency in order to protect their investment portfolio and also to take some of their cash balances abroad. Thus, they deepened their interest in investing in products traded in foreign currencies, with the US dollar being the favored foreign currency.
A significant part of the investments can also be made in Israel, through local entities, without taking the money out of Israel. This, through several products that make it possible to "hedge" the money against the decline in the value of the shekel..
It is also possible to buy investments abroad in shekels, in currency-neutral products, but this choice does not hedge against the risk of a depreciation of the Israeli currency, because it is conducted in shekels.
On the other hand, investing in dollars or any other foreign currency involves currency exchange costs, on which a conversion fee is charged, and this is in addition to other fees including buying and selling fees, custody fees and management fees.
Through the dollar investors enjoyed returns of 10%
Another investment option for Israelis is dollar funds. This is a product similar to shekel money funds that have become a hit in the fund market over the last year because they are revised as the interest rate of the US Federal Reserve rises. It is a solid product that is more like a bank deposit than a mutual fund.
The recent strengthening of the dollar has already allowed some of these funds to show returns of about 10% or more over the last year, when their initial return is higher in advance compared to the shekel money funds, because the interest rate in the US is higher than the interest rate in Israel.
These are very solid and liquid funds, so investors can sell them immediately, but if the US Federal Reserve decides to lower the interest rate, the guaranteed return (these funds are short-term) will also decrease.
Despite the temptation of a relatively high yield compared to the shekel funds and the stock markets, it should be remembered that exposure to foreign exchange is not necessarily suitable for everyone. Although the interest rate in the US is expected to remain relatively high in the coming months as well, the dollar exchange rate may change significantly and thus these funds will lose their attractiveness.
Dollar exposure through overseas stock markets
Another type of mutual fund that allows exposure to the US dollar is Exchange Traded Funds (ETFs) that follow various indices abroad. The Israeli institutions offer a series of such funds, including those that follow the leading indices in the US, such as the S&P 500, Nasdaq or Dow Jones, as well as other leading indices in other countries around the world including in the Eurozone.
Those who wish can also follow sectoral indices on foreign exchanges. Tracking is not limited to stock indexes, and bond indexes can also be tracked.
Israel Securities Authority data show that between February 1 and 19, funds investing in shares abroad raised NIS 2.36 billion and funds investing in bonds abroad raised NIS 532 million. For comparison, the funds investing in shares in Israel redeemed during this period NIS 1.5 billion and those investing in Israeli bonds (government, corporate and combined) redeemed NIS 3.5 billion.
The Institutions prefer overseas markets over the TASE
Another savings option is a dollar bank deposit. Here too, rates have risen with the US Fed rate hikes, but this is a product intended primarily for investors who wish in these times of uncertainty to reserve a fixed interest rate for themselves over time and do not need the liquidity made possible by investing in financial funds.
Beyond investing mutual funds or a bank deposit, it is also possible to make a direct investment in shares and bonds traded in dollars abroad.
For their part, Israeli institutional entities, which manage assets amounting to more than NIS 2.5 trillion, have in recent years preferred to invest more of their money abroad than on the TASE. This is because to generate a significant return for their customers, they need to make investments on a scale that the Israeli capital market is unable to offer. Some institutional investors already report that more than half of their assets are invested outside of Israel.
Published by Globes, Israel business news - en.globes.co.il - on February 22, 2023.
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