Money invested overseas flows back to Israel

The fall in Israel’s risk premium and the optimism that has taken hold of local investors, thanks to the successful military operation against Iran, brought the Tel Aviv Stock Exchange one of its strongest ever months in June, with a rise of over 10% in the main indices. The trend was also manifest in the decline in yields on government bonds, and in the strengthening of the shekel against the major currencies, particularly the US dollar. The shekel-dollar exchange rate fell by 5% over the month, to NIS 3.34/$.

The market rally was partly fueled by money flowing to mutual funds that invest in the Israeli stock market, at the expense of investment in the US market. During June, there was an inflow of NIS 6.2 billion into the mutual funds, led by the ETFs tracking the main Israeli stock indices, which raised NIS 2.5 billion. At the same time, there was an outflow of NIS 1.15 billion from funds tracking overseas indices.

Behind the trend of diverting money from overseas to Israel, on the part of both financial institutions and private investors, lay not just the strong returns and the confidence in the local market, but also the strengthening of the shekel, which eroded the returns on funds tracking Wall Street indices, particularly the S&P 500 Index, which has been a favorite among Israeli investors in the past two years. Although the index has risen by 5.5% so far this year, the year-to-date return for Israeli investors in funds that track it is minus 2%, because of the fact that the shekel has strengthened by 7.2% against the dollar during the period.

“We’re talking about a great deal of money flowing into Israeli funds, and to the extent that this trend repeats itself, I think that it could fuel a continuation of the rally here in Israel. The Israeli market is not very liquid and it’s enough if some of the people who have transferred their money to overseas tracks in the past two years start to bring it back to Israel to fuel the next rally on the local stock market,” says Yuval Beer Even, portfolio manager at Migdal Group.

Sabina Levy, head of research at Leader Capital Markets, shares Beer Even’s optimism. “We’re looking at a scenario that is either good or excellent for the local stock market. I find it hard to see any significant sudden negative turn of events on the market or drastic correction,” she says. Nevertheless, she hedges her remarks by stressing that “we have learned in recent years that unforeseeable things can happen.”

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In Levy’s view, the optimistic scenario has two parts to it. The first, besides the removal of the Iranian threat, also contains a geopolitical move in the form of peace agreements and normalization with more countries. That will open up additional markets for Israeli companies and bring them new customers, supporting the continuation of the positive momentum on the market.

Alongside this she sketches another scenario, still optimistic but less so, in which there is security quiet and rapid recovery from the war, but no important diplomatic agreements. “In this event, I think that investors will perhaps try to be more precise about their exposure. What we have seen in the past few weeks has been very broad; money has simply flowed into the market, and as soon as things stabilize and the enthusiasm wanes a little, I think that we might see specific corrections in certain sectors or stocks,” she says.

The rally in insurance and real estate

Two sectors that have stood out way above the rest in the past month are insurance and real estate. The indices for these sectors have risen 31% and 21% respectively. “The insurance companies are an option on the market. Besides the fact that they manage marketable assets on a large scale, and when the market rises the value of the assets they manage rises, some of the companies also have life insurance policies, so that they participate in the profits. That is to say, as the market rises and the insured accumulate profits, the company participates in this profit, and that can amount to NIS 1 billion,” explains Beer Eeven.

Whereas the insurance sector continued its positive trend from the previous months, in real estate the jump in share prices actually came after a less good period, in which some stocks had been in decline since the start of the year.

Behind the jump in these stocks in recent weeks lies the assumption that real estate companies will have a part to play in rehabilitating and reconstructing buildings and infrastructure destroyed or damaged in the war, and will benefit from broad regulatory relaxations, chiefly in urban renewal, and also from the demand for apartments with protected spaces.

To that can be added the market’s expectation of a cut in interest rates in the wake of the decline in Israel’s risk premium and the strengthening of the shekel against the US dollar. That will have a positive effect on the income producing real estate companies. Migdal’s Beer Even explains: “The value of their assets will rise, since appraisers will reduce the capitalization rate on their rental cash flow. In addition, if the interest rate falls, their finance costs will also fall, which will raise their values.”

Looking ahead, Levy and Beer Even single out two sectors that, although they have risen, are still at opportunity prices in their view. The first is commercial real estate, including companies such as Big and Melisron, which like other real estate companies are highly leveraged and will gain from an interest rate cut, and also from greater spending in a scenario of economic growth after the war.

To that, Beer Even adds another factor supporting these companies. “Unlike in the office market, hardly any new shopping malls have been built in Israel recently. In the end, the number of consumers keeps growing, and purchasing power in Israel is strong, so that if the supply of places of entertainment doesn’t grow, then sales per square meter will rise; it’s a simple equation.”

Another sector that Migdal and Leader single out is telecommunications, particularly Bezeq. “In trading, this stock has underperformed the sector, where we are still seeing an absence of foreign investors on any significant scale, so if there’s a massive return on their part to Bezeq shares, there’s some kind of room for upside,” Levy says.

Disagreement on defense stocks

The two disagree on the defense sector, in which share prices have risen sharply in the past two years, because of the wars in Ukraine and Israel. Leader’s Levy believes that despite the rises there remains value in these companies. “Looking ahead, even if the war ends, we will still see years of stock replenishment and high defense budgets, and, most importantly, as we have seen in the US and European markets, this is a sector with a momentum of investment, which can of course produce opportunities.”

For his part, Beer Even of Migdal believes that, despite the global trend of expanding defense budgets, the rises in these stocks have run their course. “The p/e ratios and valuations that the defense companies have reached are starting to be at their maximum. In a scenario in which the war between Ukraine and Russia ends, defense stocks will be heavily hit. The pricing is stretched, and these are areas in which I would be a little more wary,” he concludes.

Published by Globes, Israel business news – en.globes.co.il – on July 7, 2025.

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