Biggest Money Managers Switch to Stocks as Israel Bond Run Slows

(Bloomberg) -- Israel’s largest money managers are turning to the country’s stock market as they bet a five-month corporate bond rally is coming to an end.

Equities have started to erase the steepest discount to MSCI World peers in 18 months, while the Tel-Bond 20 index is on course for its worst month since January, according to data compiled by Bloomberg. For Meitav Dash Investments Ltd. and Psagot Investment House Ltd., it’s a good time to purchase shares.

Biggest Money Managers Switch to Stocks as Israel Bond Run Slows

The TA-25 Index’s discount to the MSCI World Index is falling, according to their price-to-expected-earnings ratios.

Source: Bloomberg

“There’s definitely a buy opportunity in the Israeli stock market,” said Zvi Stepak, chairman of Tel Aviv-based Meitav Dash, the country’s second-biggest investment house with 122 billion shekels ($32 billion) under management. “For now, the public hasn’t switched investment focus from the bond market.”

The rotation will be welcome news for stock bulls. The benchmark equity gauge dropped 15 percent in the 12 months through Aug. 18, more than 30 times the decline in the MSCI World Index, as trading volumes languished and new share offerings dried up.

Fund Flows

Israeli equity funds last month raised 336 million shekels, the most in a month since at least December 2014, according to data compiled by Meitav Dash. Companies on the main gauge trade at about 12.2 times expected earnings, compared with 16.3 times for members of the MSCI World Index. The gap between the two has narrowed to 4.1 multiples from 4.5 since July 29.

The Tel-Bond 20 Index has retreated 0.3 percent in August, poised for the first monthly decline since February, according to data compiled by Bloomberg. The index climbed to a 14-month high on July 25 as investors chased returns amid Israel’s record-low interest rates.

Still, most economists aren’t forecasting an increase this year and central bank Governor Karnit Flug has kept Israel’s base interest rate unchanged at 0.1 percent since February 2015. Tel Aviv’s TA-25 Index has dropped 3.8 percent in 2016, compared with an advance of 4.2 percent in the MSCI World Index.

“We don’t see investors rushing to switch their investments to stocks from bonds,” said Yaniv Pagot, the head of strategy at Ayalon Group, an institutional investor in Ramat Gan, Israel. “For that to happen we would need to see the local stock market advance by a few percent. Valuation isn’t everything.”

Returning Cash

Israeli regulation in industries from telecommunications to gas and banks has weighed on shares as the government introduced reforms to cut the cost of living and boost competition.

“Slowly we’re seeing large parts of this regulation starting to be behind us, which is one of the reasons we’re seeing an opportunity in the Israeli stock market,” said Ori Greenfeld, the chief strategist at Tel Aviv-based Psagot, which manages about 190 billion shekels and recommends clients boost holdings of Israeli stocks to 45 percent of their portfolios from 40 percent. “The local stock market will outperform bonds and provide investors with a better return and hence we see room to bring back some investments from abroad to Israel.”