National Economic Conference"Once the geopolitical situation calms down, those who remain in the Israeli market will be duly rewarded"
National Economic Conference
"Once the geopolitical situation calms down, those who remain in the Israeli market will be duly rewarded"
Barak Benski, the Deputy CEO of Clal Insurance subsidiary and investment arm Canaf, spoke on a panel at Calcalist and Bank Leumi’s National Economic Conference alongside Hagit Argov, Head of the Finance Division at Bank Leumi, and Anat Levin, CEO of BlackRock Israel
"The Israeli market is very attractive. Once the geopolitical situation calms down, those who remain in the market will be duly rewarded," said Barak Benski, Deputy CEO and Head of Investment at Canaf, a subsidiary and investment arm of Clal Insurance, on a panel at Calcalist and Bank Leumi’s National Economic Conference.
"In the short term, we are in a state of great uncertainty, due to the geopolitical and security situation. On the other hand, the Israeli market is significantly undervalued. There is a very high risk premium embedded in both the Israeli bond market and the stock market. From this perspective, investment in Israel has significant value even in the short term, and should not be underestimated."
The panel, entitled "Will Israel's Financial Risk Materialize?,” was moderated by Calcalist’s Yarden Rozanski, and also included Hagit Argov, Head of the Finance Division at Bank Leumi, and Anat Levin, CEO of BlackRock Israel.
The major banks are trading at 80% of their capital, and they are considered to be a reflection of the Israeli market. Does this mean things will get better or worse?
Argov: "We've seen the results and performances of the banks with double-digit returns. The pricing reflects the existing uncertainty. Once the war is over, the pricing will better reflect the banks' stability."
There are also significant global geopolitical tensions; the war in Ukraine, the assassination attempt on Trump etc. What does BlackRock think that the global investor should do at this time?
Levin: "We are looking at five major global trends, and I suggest that anyone who is managing investments look at how these trends impact them. The first is geopolitics: the world is divided into economic trade blocs, which have long-term inflationary implications because governments often don’t behave the most efficiently and will act for energy independence and supply chain independence. The second trend relates to energy: to produce more energy, especially low-carbon energy, which is a very significant issue globally, there are many infrastructure investments. It is easier for the world to produce solar or wind energy than to find another oil field.
"The third trend is demographics, including urban processes and a decline in the workforce. The fourth issue is AI, which is a revolution whose impact will be similar to the industrial revolution, if not greater. In a decade, we will live in a completely different world, one which we can’t even conceive of yet. The final issue is the future of the financial world, where we will see much more private credit. Since interest rates will remain high for a long time and inflation will stay high, it means banks will push some of the credit outside."
Interest rates translate into significant financial difficulty for many individuals and businesses. Hagit, when you wake up in the morning, who are the clients you are most concerned about?
Argov: "Beyond the uncertainty we live with, there is a high-interest environment, and this is mainly felt by households experiencing the burden of mortgage payments and other bills, as well as small and medium businesses. For mortgage payments, banks don’t see significant defaults, and since the beginning of the year, there has been a kind of recovery. This is seen, for example, in credit card consumption in the Center and South. The North is still experiencing the war, and the recovery there is slower."
Barak, since you took office at the end of 2022, you have made significant investments in real estate, especially in residential properties. Do you still think this is an area for opportunity at this time?
Benski: "Precisely when we saw the weakness in the residential real estate market and the drop in sales, alongside the rise in interest rates and the judicial reform, we thought it was an opportunity to invest in leading companies in the field. In recent months, we see buyers returning, the level of sales returning to 2019 levels, even if we aren’t in the mania of 2021. In the end, demographics beat interest rates, and we believe this will continue. One can look at periods when interest rates were higher than they are today, and ultimately, housing prices continued to rise. High demand surpasses supply and there is difficulty in completing projects on time, so ultimately, we think we will see a supply problem and continued price increases. Therefore, this is an opportunity to enter and invest in companies. We have already made such investments, and we plan to make more."
Real estate is a significant part of the economy and probably one of the public's major points of interest. It seems that when looking at the big picture, this economy is strengthening at the expense of the financial one. Why is this happening?
Levin: "We are in a changing world, and we definitely see a shift from the financial world to the real world. The economic environment is different; interest rates will remain high for longer than expected, and inflation is much stickier, and we need to get used to coping with such interest rates. This means that governments need to pay more for debt, and then they direct infrastructure projects to the private market.
"Here is an example of the transition to the real world. The infrastructure world knows how to generate cash flows and adapt to inflation. There were periods when interest rates were higher, and companies survived and thrived. This is the time to be realistic. This is the time to lean into the change that says growth might be lower, inflation more persistent, but the real gives it an advantage."
In the stock market, tech stocks are shining. How much longer can this engine drive the market forward?
Benski: "There are a few companies leading the trend. The S&P index is trading in the top decile of multiples. We can confidently say the market is expensive. And, of course, a market can be expensive for a long period and just continue to become more expensive. But today, the multiples are driven by forecasts and expectations from those tech companies that will quickly monetize AI tools and AI-based products. So far, we have mainly seen infrastructure companies like NVIDIA getting sold and showing profits.
"For other companies, the burden of proof is still high: expectations are high, and it will be difficult to meet them. Since the weight of these companies is so large in the indices, the magnificent seven are 30% of the S&P, and the tech sector as a whole is over 40%. I don't know if this will pull the market up, but it will determine the market's direction. In the long term, you need to be there, and be there big - that is what will drive economies and markets. In the shorter term, the valuations are expensive, and forecasts are challenging. You need to be cautious and manage the risks accordingly."
Tech companies don't lack funding, but many other companies find it hard to secure financing. Hagit, how do you see the role of banks today amid this complex situation?
Argov: "Banks are an oasis of certainty within a world of uncertainty. It is important for us to accompany the customer, especially in these times, and we believe that banks are a growth engine for the economy and reduce unemployment. We have experienced this in many crises - COVID-10, the attempted judicial overhaul, and now the war."
A final question. Is Donald Trump as President of the United States a danger?
Levin: "In 2024, half the world went to elections. Some have already been held, others are still underway. Most of the elections, whether we like it or not, are somehow related to the cost of living, which stems from the trends I discussed earlier. Many governments can't do much in this world because these are global trends. Therefore, we all need to understand that we’re in an interconnected world where every government, in every country, will have to pay higher interest on debt. The U.S. has now surpassed the debt level of World War II. In this world, private markets will step in. I believe in the private market, and I believe in the real market."
