On Friday night, Moody’s made a historic announcement: Israel’s credit rating was downgraded from A1 to A2 for the first time ever. The news sent shockwaves through the Tel Aviv Stock Exchange, but local investors were not moved by it. In fact, only the banking index fell by 1.7%, while the rest of Israel’s economic indicators showed slight declines.
Meanwhile, on Wall Street, history was made as the S&P 500 broke its all-time record and closed above 5,000 index points. This is the second time in a month that the index has hit this milestone. However, economists warn that this behavior indicates that the global stock market has overheated and could lead to a downgrade in the future.
The Israeli stock market has underperformed its American counterpart in the past year. From October 2023 to now, the S&P 500 has increased by about 22%, while the Tel Aviv 35 has increased by about 13%. Bernard Menor, an investment manager at IBI Portfolio Management, believes that America is still better than Israel because of geopolitical risks and concerns about future growth.
Economists also point out that political, coalitional and sectoral factors are taking precedence over future growth in Israel. The government deficit is expected to grow in the short term and war expenditures will increase. As a result of these factors and concerns about war risk, yields on short-term government bonds (up to five years) are expected to rise in the coming period. This means that state investors will have to pay more for their bond investments due to higher costs of capitalization bonds (up to five years).
On Monday morning, Moody’s Shafferer spoke with Globes and stated that in practice, Israeli government bonds are already priced according to a rating of BBB+ which is lower than what Moody’s gave them earlier this week. Shafferer believes it is worth considering investing in H short-termism of Israeli government bonds as well as buying Israeli government bonds abroad after margins between them and US government open up further.