Last week, the Tel Aviv Stock Exchange experienced a decline of over 3%, signalling a return of fear to the local stock market after a period of positive momentum in April. In contrast, Wall Street’s main index, the S&P 500, saw a slight increase of 0.3% in a volatile week. As a result, the gap between the Tel Aviv Stock Exchange and Wall Street has widened since the beginning of the year, with a 1.6% drop in the Tel Aviv-35 index compared to a 9.5% increase in Wall Street’s main index.

The main reason for the increased volatility in the Tel Aviv market last week derived from security related statements released by Chief of Staff Herzi Halevi concerning the Iranian situation. His remarks disrupted the positive momentum that had been building since the freezing of legal reform legislation, which contributed to significant losses in the stock market during the first quarter of the year.

Nevertheless, despite the mounting concerns gripping investors, Discount Bank, a prominent Israeli financial institution, has issued a prudent recommendation to cautiously re-enter the domestic stock market. Their advice targets clients who have recently trimmed their Israeli stock holdings, urging them to incrementally augment their investments while capitalizing on the market’s vulnerability. The bank’s rationale for this guidance encompasses several factors, such as the commendably stable economic landscape in Israel, the attractive valuation of stocks, and the assertion that certain risk events, including the budget’s approval, have already been overcome.

According to Discount Bank, when comparing key financial ratios of shares included in the main TA-35 index with those of global indices (Dow Jones, S&P 500, European Eurostoxx 50) and historical levels, Israeli stocks are trading at relatively cheaper multiples. For instance, the TA-35 index is 22.1% below its historical median, while the Eurostoxx index is 6.9% higher and the S&P 500 and Dow Jones are both 4% lower.

Discount’s case is further strengthened by the fact that the state budget has been passed and Israel’s credit rating by Moody’s has not changed. However, it is still wary of inflation and judicial reform uncertainties that could be affected by the outcome, as well as the high-tech challenges that could follow.

Regarding the local macroeconomic situation, Discount assesses it as reasonable and relatively good in some parameters. They note that the expected growth slowdown in 2023 compared to pre-pandemic years is not unusual in a global comparison. In the first quarter, Israel’s GDP growth stood at 2.5%, surpassing market forecasts. Positive factors contributing to growth include decreased imports, increased service exports, increased consumption, and growth in the investment in fixed assets. And while some segments experience a slowdown in growth, overall data remain reasonable considering the effects of the pandemic and rising interest rates.

Notably, although the Israeli economy’s growth forecast for 2023 (2.5%) is lower than the pre-pandemic average, it still stands among the highest globally. In contrast, notable economies like France and Germany (with the latter having recently entered a recession, as indicated by last week’s report) are projected to encounter negative or sluggish growth rates throughout 2023. This further underscores the relatively robust position of the Israeli economy within the global context.