Macro-economic Analysis: Indicators suggest the Israeli stock market is set to outperform Wall Street in the coming years
By Wise Money Israel Analyst
In the past 5 years, the U.S. stock index S&P 500 increased approximately 105%. The Dow Jones Industrial Index returned about 86%. However, during that time period, Israel’s Tel Aviv Stock Index (TA-25) registered “modest” growth of approximately 54%. [The TA-25 doubled and quintupled Wall Street’s performance over the past 10 and 15 years time periods respectively]. The more interesting question is what will does the future hold? Which market will outperform over the next five years?
I believe that the Israeli stock market is more attractive than other developed nations, especially compared to the American stock market that gained considerably in the past five years. Here are three key reasons why investing in the Israeli stock market is a better investment than the American stock market:
- More attractive P/E Ratios: When comparing Price/Earning ratios1 between stock markets around the world and other ratios, we can see that the Israeli market is more attractive (cheaper) than the majority of developed nations’ stock markets around the world, and in particular, the U.S. stock market. There are countries with more attractive multiples, but these are developing nations or emerging markets and not developed countries. See the table "Market Indicators By Nation". [Israel's indicators rank it as the 10th best market]
- Macro-economic indicators support growth: When we look fundamentally at the Israeli economy, there are several indicators that support long-term growth, compared with the other developed nations in the world. For example, Israel’s Debt-to-GDP ratio of 67% compares well to Germany’s higher debt ratio of 75%, 91% in the Euro block, 101% in the United States, and 230% in Japan. In addition, Israel’s unemployment rate is approximately 5.0% [OECD average: 7.4%], GDP is about 3.0%, and Israel’s population growth rate is the second fastest in the world’s developed economies (only Ireland is growing faster). In addition, Israel is characterized by a young population, well-educated (ranking second place globally for percentage of high school graduates, and first place globally for percentage for PhDs). Despite these indicators, the domestic economy is lagging compared to developed countries in per capita income. Therefore, I believe that the local Israeli economy will continue to grow at a faster pace than the developed nations average in the coming years.
- The ratio of companies’ valuation to GDP. As is well known, in the long-term a stock market’s valuation will move in relationship to certain key indicators. Warren Buffett claimed that the ratio of companies’ valuation to GDP is “the single best indicator for overall stock market pricing.” The table "Capitalization to GDP" summarizes the stock markets pricing valuation as derived from this ratio.
As you can see in the graphs here, the ratio between the companies valuation compared to GDP of the Israeli stock market is approximately 0.78, meaning it is priced between “fair value” value and “cheap market” value. On the other hand, the U.S. stock market ratio is 1.27! In other words, the indicator shows that the U.S. stock market is very, very expensive, and we can expect to see a deep correction downward in U.S. indices.
Accordingly, I believe that in the near future, the Israeli stock market will outperform compared to the U.S. stock market, and therefore, we recommend that you increase your exposure to Israeli stocks, and consider closing U.S. stock market positions.
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1 Price/Earning Ratio - dividing the value of the trading company by net profit last year. This test was done on all public companies of the leading indices in each country.