Interviewed before yesterday's huge market falls caused by DeepSeek, Mizrahi Tefahot regional financial advisor David Shelly focuses on the inversion of the bond yield curve. The yield on government bonds should be higher the longer you invest, and usually is.
But the yield curve, which continuously depicts the yields on government bonds over all time periods, inverted two years ago and is now on its way back to "normal." Shelly tells Globes, "It is an indicator that has predicted previous crises with high probability, and it again presents the possibility of a crisis that could catch many investors off guard. In the last 20 years, every time the curve has inverted and returned to a "normal" state after a while, while the US Federal Reserve has cut interest rates, a recession has hit the US a few months later.
"The indicator signals the possibility of a recession in the US economy and a major fall in stock indices over the coming months. Interest rates are starting to fall and it is thought that this will lead to gains, but when there is a reversal and the curve returns to normal, it is a sign of the possibility of a recession in the next few months. The markets are at their peak and Donald Trump's entry into the White House only increases market volatility."
Consequently Shelly warns investors, "Do not rush to increase exposure to stocks. On the contrary, this is the time to examine the risks in the portfolio, reduce exposure to stocks and return to your original exposure before the increases of the last two years."
However, Shelley does not recommend a complete exit from the stock market, since "Over time the market rises and the periods of decline are short and rapid. In the long term, optimism is an important trait for investors."
To divert money to Israel
Accordingly, Shelly prefers to bring money back home to Israel. He says, "Israel surprisingly finished 2024 in an amazing way and even surpassed the indices in the US. The expectation of the end of the war and the rehabilitation of the economy brings optimism to the market.
It is clear that if there is an upheaval in the US markets, it will also affect Israel, but we have already seen in the past that the Israeli economy has shown a rapid recovery capacity compared with the major economies, and therefore money needs to be diverted to Israel. Growth in Israel is relatively high and the deficit is expected to decline and is significantly lower than most of the Western world."
Interest rates will fall 'faster than expected;
On the positive side, Shelly believes that interest rates in the US and Israel will fall faster than expected this year and gives the US as an example. "Last year, the expectation was for six cuts and in fact it only fell three times. This year, the opposite is likely to happen — the market expectation is for one or two cuts and I believe that it will fall more.
Therefore, it is worth investing in bonds and 'fixing' today's yields. It is certainly possible that during the year there will be a change in investors' tastes from the stock market to the bond market."
As a result, Shelly recommends to solid investors a portfolio consisting of 7% US stocks, 8% Israeli stocks, another 25% in Israeli corporate bonds, 30% in Israeli government bonds and 5% in foreign corporate bonds. He allocates the balance to the "bunker" — 25% in makam and deposits, since "the yield on makam (a one year Bank of Israel loan, equivalent to a one-year bond) is very good, and if sharp declines occur, this will allow both a return and an increase in exposure."
For an aggressive investor, he recommends giving up the liquidity component but also reducing exposure to stocks. Thus, he allocates 15% to US stocks, 25% to Israeli stocks, 30% to Israeli corporate bonds, 20% to Israeli government bonds and 10% to foreign corporate bonds.
Defense industries upside
When asked which sectors are worth investing in over the coming year, Shelly recommends the tech sector abroad, which he says, "Will continue to be one of the main growth engines in the global economy, with an emphasis on areas such as cybersecurity, data centers and AI" (the interview was conducted before the storm in the industry caused by DeepSeek).
He also recommends the health sector, one of the weakest in 2024, and notes that it is "Considered stable and has potential, but we should also be aware of regulatory challenges from the new administration."
Finally, he recommends the defense industries sector both in Israel and abroad, as it is expected to continue to benefit from global geopolitical instability, in particular the Russia-Ukraine war, and the "multi-regional war in the Middle East."
According to him, the tensions have led "many countries, especially in Europe, to look around and prepare on a scale they never have before, with an increase in the defense budget to finance the purchase of advanced systems, full renewal, and the like."
In Israel, he stresses bank stocks, despite the upward trend of the past year. "Traditionally, a capital multiple of 1 would guarantee a full price for bank stocks, but that is a thing of the past. Today, banks know how to generate high double-digit returns that stem from both expenses (significant efficiency gains) and income with an increase in the financial margin (high interest). And this year they will also benefit from the return of foreign investors to the market."
Shelly also recommends in Israel exposure to the residential construction sector. He explains, "The supply of land in Israel has been decreasing over the years, and the population rate per square meter is one of the highest in the West.
This year too, we will see a continued decline in the supply of residential properties and the pace of building starts, while there are rising costs, a shortage of workers and high interest rates. With a quarter of the Tel Aviv Construction Index made up of companies in the infrastructure sector, it is expected to benefit from massive investments in renewing infrastructure that was damaged in the war."
