Menora Mivtachim: Why Long-Term Investors Should Stay Invested Amid Market Highs
Menora Mivtachim investment manager Oren Montal advises long-term investors to avoid market timing despite recent sharp gains, recommending a diversified general portfolio with high dollar yields and foreign currency hedging.
Global and domestic markets are wrapping up several years of exceptionally strong performance. The local TA-125 index has completed two years with a surge of 90%, despite recent weakness, while the S&P 500 index is completing four years of similar double-digit returns.
Yet even after these sharp gains, Oren Montal, investment manager of member funds at Menora Mivtachim Holdings, suggests not taking the foot off the gas or waiting on the sidelines for sharp declines in the USA.
According to him, long-term investors must avoid attempts to time the markets after years of a bull run. "Do not start timing the market. In such timing attempts, people usually exit too early and return too late. If you behave this way, your returns will be hurt. No one knows how to time the market. The leading rule is consistency according to age and personal needs: the younger you are, the higher the exposure to equities should be, and the older you get, the more you reduce risk."
In Montal's view, the most problematic event for markets is inflation, especially if it persists. Rising bond yields are the direct result. "The highest risks are inflation, due to commodity prices affected by the war between the USA and Iran," he details. "Even if there is less shooting right now, the Strait of Hormuz is probably not 100% open, which drives up the prices of commodities coming out of the Gulf. Alongside this, the war between Russia and Ukraine continues to affect energy and food commodity prices. All of these generate high inflation and drag rising interest rates in the USA, Europe, and other countries, alongside yields of over 5% on bonds in the USA."
Yet he is not sure that all of this points to a crisis. Unlike 2022, when inflation led to a rapid rate hike from 0% to 5.5% in the USA, "Right now this is an increase of half a percent, and even if the interest rate rises another two or three times in the coming year, as expected, the US economy can handle it."
When might the market be hurt? "If inflation and interest rates remain high, or for a much longer period, in the end it will hurt the American consumer, who is the central growth engine of the US economy, among other things due to the rising cost of loans and mortgages."
In our domestic arena, Montal points to a series of challenges for the upcoming period. "Risks in Israel include the continuation of the fighting, which brings a very large government deficit, damage to growth, and the possibility of a higher interest rate.
"Another risk is government paralysis in the event that the 2026 elections end without a decision and we are dragged into another election campaign. Such a scenario will not contribute to growth and this is a high-probability scenario."
Alongside these, he mentions the talk of international sanctions as a factor to monitor. "Right now this does not harm the economy, but it is a risk factor." He further notes that "Israel's strong engine is the high-tech sector, which is directly affected by Nasdaq performance and the demand for technology abroad, and activity there is growing strongly. If there is a slowdown in the sector, it will clearly affect Israel as well."
Hedging the portfolio against foreign currency
Regarding the composition of the investment portfolio, Montal prefers to forgo a conservative portfolio and suggests a general portfolio: "People are no longer in the conservative track for medium- and long-term investments. Most people today are either in the general track or equity-oriented tracks." He notes that rising bond yields make them an interesting field: "You can get a dollar yield of 8% on non-investment grade corporate bonds. Unlike the previous ten and twenty years, there is currently a very nice safety cushion for portfolios in the general tracks, which will manifest if declines hit the equity portion."
In the general portfolio, he suggests an exposure of 26% to equities in the USA, 18% to equities in Israel, and 8% to equities in Europe, Japan, and emerging markets. In the bond portion, he proposes allocating 14% to Israeli government bonds, 8% to Israeli corporate bonds, and 4% to foreign corporate bonds, with high dollar yields as mentioned.
In addition, 21% is allocated to the illiquid component: private loans and private equity funds at 9% each, alongside real estate (3%). As he notes: "A third of the portfolio is in components uncorrelated with the stock market; those that will not necessarily fall if stocks decline. Another 1% of the portfolio is allocated to liquidity."
After seeing in recent years how the shekel can jump sharply against the US dollar and erase a whole year's return, Montal suggests hedging most of the exposure in the general portfolio against foreign currency, except for 18%: "The US dollar in Israel strengthens during times of volatility or sharp declines in the USA, or security escalation at home, so it serves as a kind of natural hedge against declines."
In the aggressive portfolio, he suggests full equity exposure. 48% is allocated to US equities, which is "the most liquid and interesting market," 36% is allocated to Israeli equities, 8% to European equities, and another 8% to emerging markets and Japanese equities.
Montal emphasizes that equity exposure to Israel has been reduced from over 40% in the past to about 35%, after the local stock exchange completed a rally of about 100% in two years, and therefore "stocks have become very expensive and are no longer cheap relative to the world."
Technology and finance
In the sectoral breakdown, Montal remains strongly positive on the technology sector, focusing on the semiconductor and software sub-sectors in the United States. "Most of the growth in corporate profits comes from the technology field. We are witnessing high demand for chips, a surge in investments in data centers, and software companies beginning to show tangible profits from artificial intelligence solutions.
"Software sector stocks suffered greatly from the beginning of the year, and in recent months we have started increasing positions there." Another sector benefiting from AI development is the electrical infrastructure field, which benefits from growing demand for energy.
When asked about the long-term risks of the AI revolution, Montal fears that "in the future AI systems will become smarter and more independent than humans, alongside regulatory uncertainty that is difficult to price today."
He adds that "the best protection for an investor is always to ensure the purchase of quality companies at a reasonable valuation, and to maintain a broad global and sectoral diversification that will provide safety cushions in the investment portfolio. Therefore, as mentioned, exposure to Japan and emerging markets, which rose the most since the beginning of the year, with emphasis there as well on technology."
He also identifies potential in the global financial and banking sector: "Banking is interesting in terms of valuation, the sector is relatively cheap, and there are positive reforms and opportunities there."
On the other hand, he warns against rising interest rates affecting the real estate sector, "which classically suffers from rising interest rates," and is also unenthusiastic about the energy sector, even though "there is very strong growth in company profits in the field. But one war ending in the world is enough for energy prices to drop very, very sharply, and therefore it is dangerous. This is a more political field, and we prefer not to have a position there."
