Tel Aviv Financial Stocks Slip Toward Correction Amid Mounting Uncertainty

A noticeable shift has occurred in recent weeks on the Tel Aviv Stock Exchange. Following months of healthy gains, financial stocks are reversing direction and exhibiting negative momentum. Over the past 20 trading days, the TA-Insurance index and the TA-Financials index have each lost 10%, bringing them close to correction territory. This weakness is not confined solely to financial shares; the TA-90 index is also showing prolonged underperformance compared to the leading indices, with many stocks trading significantly below their peaks earlier this year.

However, the declines are particularly pronounced in insurance stocks and investment houses, which were among the primary beneficiaries of the stock market rally over the past two years. Insurance companies and investment houses are widely regarded as a "proxy for the market" because their profitability is exceptionally sensitive to the direction of capital markets. When stock markets rise, the value of assets under management grows, management fees are collected from a broader asset base, inflows tend to improve, and performance fees are occasionally collected. Simultaneously, insurance companies benefit from positive impacts on their proprietary investment portfolios (nostro) and financial earnings. When markets fall, the mechanism operates in reverse: assets under management shrink, redemptions may increase, inflows weaken, and profitability takes a hit.

Consequently, the shares of insurance companies and investment houses tend to react with greater intensity than the broader indices. They are not merely exposed to the capital market through their investments; they depend on it as a primary source of revenue. In this sense, financial and insurance stocks serve as the proverbial "canaries in the coal mine" of the capital market. Because their profitability depends on the volume of assets under management, yields, and inflow rates, shifts in expectations regarding market direction often manifest in their stock prices well before any deterioration is evident in underlying business operations. When investors begin to fear a weaker economic period, capital market-dependent financial firms are often among the first to suffer.

This downturn arrives during a period when the conditions that previously supported the local bourse are growing less favorable. As revealed by Calcalist last week, net foreign equity purchases in Tel Aviv have dropped by 70% since the beginning of the year compared to the same period last year, and foreign investors in the banking sector have transitioned from net buyers to net sellers. Thus, one of the key sources of demand supporting the market has weakened precisely as political uncertainty begins to mount. Despite this negative trend, insurance stocks remain massive winners of the multi-year equity rally, with the TA-Financials index surging 236% and the TA-Insurance index skyrocketing by nearly 500% over the past three years.

Global Pressures and Local Uncertainty

Adding to domestic pressure are international developments. Rising US bond yields are intensifying competition for investor capital. As higher yields become available from relatively risk-free assets, higher expected returns are required to justify equity investments. This impact can be especially acute for companies and sectors that enjoyed sharp gains and elevated valuations. Furthermore, concerns linger that the artificial intelligence investment boom has inflated valuations in certain US stocks to levels that are difficult to justify over the long term. If a significant correction occurs on Wall Street, the Tel Aviv Stock Exchange will find it difficult to decouple from that downward trend.

Shimon Uliel, head of Israeli investments at Altshuler Shaham Provident and Pension, notes that at this stage it is difficult to point to a definitive "flight" of investors from Israel based on conventional indicators.

If you think people are afraid of Israel or that there is a deep crisis in Israel, we would see a significant strengthening of the dollar, or shifts in bonds and CDS (sovereign default insurance). We haven't seen any real drama in these figures. You cannot point to anything definitive yet. But you do see a weak market, and it seems the market is effectively pricing in a higher probability of scenarios perceived as negative.

According to Uliel, the high sensitivity of insurance and investment stocks to market developments is no accident. Market managers remain exceptionally cautious about making public statements, particularly regarding political matters, for fear of being aligned with a specific camp. Against this backdrop, remarks by Roy Vermus, controlling shareholder of Israel's largest hedging firm, calling on associates over the weekend to push for a regime change, stood out sharply.

Economic Fundamentals vs. Future Scenarios

A senior investment manager at a large institutional entity points to three main factors weighing on the stock market: rising bond yields, security uncertainty, and the upcoming elections. He argues that the underlying condition of the Israeli economy alone cannot explain the market weakness. Consumption continues to grow, and economic activity does not currently point to a crisis. The core issue lies in the gap between current economic data and the future scenarios feared by investors.

The same investment manager notes that the market is entering the election period following significant pullbacks already registered in the indices. The TA-35 index has retreated by 10% to 11% from its peak, while the TA-90 index has dropped by roughly 22%, meaning that a portion of the risk is already priced into stock values. Nevertheless, he warns that financial stocks may continue to exhibit high volatility. In banking, high interest rates support net interest margins, but excessively high rates can harm consumers and credit portfolio quality. In insurance and investment houses, sustained market weakness directly damages assets under management, inflows, and commission revenue potential. Therefore, further escalation in political uncertainty or debt market volatility could manifest first within these specific sectors.

Uliel emphasizes that from the capital market's perspective, the central question is not necessarily which political camp wins the election, but what political stability emerges in its wake. An outcome leading to a narrow government, a fragile coalition, or a political system struggling to pass a state budget and vital reforms could drive up Israel's risk premium.

Regarding foreign investor behavior, Uliel remains cautious about defining the trend as a broad exit from the local market. Foreign participants may simply be scaling back activity and awaiting political clarification. Conversely, foreign voices offer a different perspective. Dr. Elliot Hentov, head of macro policy strategy at State Street Global Advisors, notes that global investors largely view the Israeli stock market as closely tied to the US and technology sectors, deriving performance from those broader trends.

The recent drop is not very different from the one in the US market, where financial stocks in particular have underperformed the general index by nearly 15% since the beginning of the year, primarily due to yield curve forecasts.

Regarding the impact of the upcoming elections, Hentov believes that foreign investors do not view Israeli elections as a core variable, as foreign policy direction is unlikely to fundamentally alter the overarching economic trajectory.