As this Jewish year comes to a close, we want to thank you for your continued trust in Priority and our abilities to manage your savings and provide financial advice. While we have generated positive returns, the investment climate is challenging and we continue to put our primary focus on the preservation of your capital.
As the curse or blessing goes, “we are living in interesting times.” We have seen interest rates go below zero in major currencies, while major government and safe corporate bonds are yielding less than 2%. The unprecedented pumping of liquidity in a coordinated action by the global central banks has created an environment of There Is No Alternative (“TINA”) whereby investors are pushed by the zero-interest rates into higher risk investments by force. This new market phenomenon of investors paying a government, bank or even a company to hold their money at a negative rate of interest is unprecedented and goes against the first rule of finance – the time value of money. This has rendered classical investment models and strategies useless and has made many economics textbooks redundant. Many leading market pundits have warned about the eventual need to unwind this government intervention and return interest rates to a more normal level. However, the fear of deflation and slowing economic activity has pushed out these fears (“kicked the can”) each year as government balance sheets continue to balloon with endless printing of money, causing a scramble for assets such as stocks, bonds and property. As a result of this forced buying, current market valuations appear expensive and as a result projected long-term returns are unfavorable. The net result of this means that as asset managers we have had to work doubly hard, to look more broadly at all viable asset categories while increasing diligence on quality and concentration on capital preservation to avoid being seduced with the crowd and to protect our clients’ assets.
Our primary focus, as you are aware, is the Israeli market, and interestingly, Israel has not been a major player in this global economic story; as Bilaam prophesized, we as a nation reside alone. This massive global intervention is fighting the effects of slow growth and deflation being caused by household balance sheet correction from the crash of 2008, increasing technological displacement and demographics. Interestingly, Israel has suffered from none of those events. Israel weathered the financial crisis due to its antiquated banking laws from the 1950s which hampered securitization and kept underwriting tight (for household sector as opposed to corporate/tycoon sector!). Technology is the most important part of the Israeli economy and is a source of job creation and growth, not economic devastation, compared to Detroit as an example. Lastly, demographics, well above OECD birth rate and consistent immigration. These factors combined have rendered Israel stronger in relative and absolute terms with steadily rising GDP per capita and is manifested by the shekel appreciation. We can proudly say that our portfolio is Israel dominant, and we have bought on behalf of you, our clients, millions of shekels, and invested in Israeli bonds and equities.
We hope Israel continues to grow from strength to strength and wish you, our clients and your families, a happy and healthy new year.
Moshe Klempner