In an unexpected announcement, credit agency Moody’s dropped Israel’s credit rating from A1 to A2, marking the first time in the country’s history. Despite this precedent-setting move, the investors on the Tel Aviv Stock Exchange were not moved by it. The local flagship index, Tel Aviv 35, only saw a slight decline of about 0.6%, with most of Israel’s economic indicators showing similar slight declines.
At the same time as this news was breaking in Israel, history was also being made on Wall Street. The S&P 500 index set a new all-time record and closed at more than 5,000 index points, making it the second time in a month that it reached this milestone. However, Meitav Chief Economist Alex Zabrzynski warned that “the behavior of the global stock market indicates that it has overheated.”
The risk seems to be increasing on both sides of the barrier: in Israel, where a higher rating will result in higher debt costs for all companies in the economy and for households as well; and in America as the surge continues on Wall Street and there is an increasing chance of a downgrade coming soon.
In comparison to its American counterpart, the Israeli stock market has shown lower returns over the past year. From October 2023 to present day, S&P 500 increased by about 22% while Tel Aviv 35 increased by about 13%. Investment manager Bernard Menor believes that although geopolitical risk is high in both countries, it is immeasurably higher in Israel due to its ongoing conflict with neighboring countries.
Moody’s report pointed out several factors that come into play: political instability, coalition instability and sectoral concerns at the expense of future growth. The government deficit is expected to increase in the short term due to war expenditures and other factors like COVID-19 pandemic recovery costs which will further increase interest rates for Israeli government bonds.
The downgrade will impact different markets differently: government bonds may see rising yields on short-term bonds (up to five years) which means state will have to pay more to its bond investors; Israeli government bonds are already priced according to a rating of BBB+ which is lower than what Moody gave them; therefore investors should focus on investments with H short-termism of Israeli government bonds according to Moody Shafferer who added that beyond this there should be investment opportunities abroad where margins between Israeli government bonds and US government open up. Roi Keren also advises investing in corporate bonds may fall due to downgrade since risk spreads returned their pre-war level which indicates local capital market won’t price downgrade risk