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The war in the Gaza Strip, fears of a widening deficit and subdued economic growth have led institutional investors in Israel to transfer 151 billion shekels (the equivalent of nearly US$40.2 billion) abroad since early October 2023, according to the Israeli publication Calcalist.
The amount is calculated by Calcalist based on the data reported by the pension funds and insurance funds (provided fund, government managed pension fund) to the Israeli market regulatory authority. According to reports, the average foreign exposure of institutional investors in the insurance fund sector increased from 51.7% at the beginning of October 2023 to 56.3% at the end of July this year (the date until which the data was updated).
Large institutional investors in the insurance sector manage assets of 682 billion shekels, which means that the value of foreign placements of this sector has reached 384 billion shekels. For comparison, before the war, the value of the sector's assets invested abroad amounted to about 306 billion shekels, while the sector managed 592 billion shekels. Therefore, since the beginning of the war, the sector has accumulated 90 billion, while foreign exposure has increased by 78 billion shekels, which means that almost every shekel entering the system is invested abroad, according to Calcalist.
• Migdal Insurance: "The money received by the institutions in recent months goes abroad: the reason is related to the gloomy situation from a political point of view"
The situation in the pension market is similar, but more moderate. Institutional investors increased the average foreign exposure of pension funds to 50% in July this year, from 47.6% at the beginning of October 2023, according to the source.
Pension funds manage 854 billion shekels, so 427 billion are invested abroad, compared to early October, when the sector managed 716 billion shekels, while capital invested abroad totaled 341 billion shekels. In other words, since the beginning of the war, the assets of Israel's pension funds have increased by 136 billion shekels, of which 86 billion have been directed abroad.
According to Calcalist, the war is not the only reason why local funds are looking to invest the money across borders. Indeed, in the early months of the conflict, Israeli institutional investors had even begun to increase their exposure to the domestic market. This, based on the idea that the Israeli stock and bond market represented a long-term investment opportunity, especially in light of the fact that foreign investors had fled, sending stock and bond prices down. In addition, the increase in local exposure expressed a solidarity of Israeli investment managers who wanted to show their confidence in the domestic market.
However, since February, the institutional perspective has changed.
Yuval Be'er Even, associate director of investments at Migdal Insurance, says: "The money received by the institutions in the last months is going abroad, it is a clear process. The reason is related to the gloomy situation from the political point of view (...). A deal on the hostages is getting more distant, indicating that the fighting will continue, which has many consequences. The first is the state's need to finance the fight. It is difficult for the government to raise money from abroad at good interest rates, so the burden on institutional investors is high, but there is a limit to how much they can take. Recently, the economic data also starts to limp, and inflation rears its head again".
In April, S&P downgraded Israel's credit rating from AA to A+, maintaining a negative outlook. In addition, inflation continued to rise in April, dampening expectations for an interest rate cut. In April and May it became clearer that Israel's deficit would increase, rising to 7%. Inflation published yesterday indicates an annual rate of 3.6%, delaying a possible rate cut, while economic growth in the second quarter of the year was only 0.2%, an annual rate of 0.7%, according to Calcalist.
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