On Friday, Moody’s announced a historic decision to downgrade Israel’s credit rating from A1 to A2. This marks the first time the country has ever received such a rating, and further downgrades are expected. Despite the significance of this move, investors in the Tel Aviv Stock Exchange were not significantly impacted. The local flagship index, Tel Aviv 35, which trades the largest companies in Israel, only saw about a 0.6% decrease.
At the same time as this announcement on Israel, history was made on Wall Street with the S&P 500 index breaking the all-time record and closing at more than 5,000 index points. This, combined with high investor optimism, has led to an increase in global stock market risk. Investors are now faced with increased risk in both Israel and the US. While the American market has performed better than Israeli market in past year with higher returns, geopolitical risks in Israel are much higher and economic environment is weaker. The government deficit is expected to grow in short term due to war expenditures but investors with longer horizon may find opportunities in local market.
The downgrade has opened up potential investment opportunities for those who are willing to navigate increased risk and volatility that comes with it. Recommendations include investment in banks and infrastructure while being cautious of non-bank credit sector and office real estate companies. The debt market is expected to be affected quickly by this decision as yields on short-term government bonds are likely to rise. Despite this increase in risk, local capital market may not fully price the downgrade contributing to an increase lateral returns for some investors.
Interest rate cuts in Israel may be postponed or not occur leading to negative effects on real estate market and private consumption