Israel’s Credit Rating Downgraded: Navigating Economic Impacts and Investment Strategies Amid Global Market Volatility

On Friday night, Moody’s, the credit agency, made a significant announcement regarding Israel’s credit rating, downgrading it from A1 to A2 for the first time ever. This unprecedented move is expected to be followed by further downgrades. Despite this development, the Tel Aviv Stock Exchange showed a relatively modest reaction, with the Tel Aviv 35, comprising the largest Israeli companies, only experiencing a 0.6% decline. The banking index was an exception, falling by 1.7%. While a negative trend is evident, it is not perceived as catastrophic.

Economists had anticipated a reduction, but the extent of the downgrade took some by surprise. Tamir Shapira, CEO of Ilam Mutual Funds, notes that the downgrade was already factored into the markets since the outbreak of the war. He points out that yield curves in the Israeli government bond market and the CDS curve abroad indicated this expectation.

Simultaneously, on Wall Street, the S&P 500 index, representing the 500 largest U.S. companies, broke the all-time record, surpassing 5,000 index points. Some analysts express concern about the global stock market potentially overheating, citing institutional and private investors reporting exceptionally high optimism.

This dual scenario raises risks on both fronts. In Israel, the credit rating downgrade is anticipated to increase debt costs for companies and households. Meanwhile, in the U.S., the prolonged surge on Wall Street raises the likelihood of a potential downgrade. Investors face the challenge of navigating turbulent markets in both countries.

The performance discrepancy between the Israeli and American stock markets over the past year is noteworthy. The S&P 500 outperformed the Tel Aviv 35, increasing by approximately 22% compared to the latter’s 13%. Bernard Menor, investment manager at IBI Portfolio Management, suggests that the American market remains a more favorable option due to the perceived higher risk and weaker economic environment in Israel.

However, there are differing opinions. Some view the short-term downturn in the Israeli market as an opportunity. Shapira Mailim predicts increased volatility in the domestic market and recommends investments in sectors such as banks, infrastructure, real estate (with an emphasis on urban renewal), and defense companies.

The downgrade is expected to impact the debt market promptly. Yields on short-term government bonds are predicted to rise, making the local bond market more attractive. Investors may find opportunities in Israeli government debt, considering that much of the risk has already been priced in.

Roi Keren, Bank Leumi’s regional investment advisor, highlights potential impacts on corporate bonds, anticipating a fall due to the downgrade. He suggests that risk premiums across various levels are likely to increase, affecting companies with high leverage and low coverage ratios.

Regarding stocks, Keren expects price decreases in locally traded stocks, particularly in credit-dependent sectors. Global companies with significant foreign revenues are perceived to be less affected.

In conclusion, investors are urged to prepare for potential extreme events, and caution is advised in making swift and drastic changes to investment portfolios during this period of heightened uncertainty.