Wall Street vs. Tel Aviv: Experts Discuss AI, Inflation, and Market Risks

Investors are increasingly weighing whether to allocate capital to Wall Street or the Tel Aviv Stock Exchange, while navigating the balance between broad index funds and individual stock picking. Speaking at the Next Gen Investors Conference hosted by Globes in collaboration with Harel, Bank Leumi, and Strauss at the Tel Aviv Stock Exchange, leading financial experts discussed the shifting market dynamics. Lilit Yanai-Levison, real estate editor at Globes, moderated a panel featuring Rinat Ashkenazi, chief economist at Phoenix Investment House; Riki Bash, head of investment advisory at Bank Leumi; and Efrat Kimmelman, analyst and innovation lecturer.

Expectations and Risks Are Rising Together

A survey conducted at the conference revealed that investors expect average annual returns exceeding 12%. Riki Bash admitted she was surprised by the figures, noting that after three consecutive years of robust gains and phenomenal double-digit returns across major global indices, many view this as the new standard. However, she cautioned that a portfolio generating 12% annually over the long term is heavily equity-biased. A balanced portfolio combining bonds and alternative assets typically yields around 7% annually.

"Alongside the temptation of high returns, there is significant risk that must be taken into account," Bash said. Efrat Kimmelman, representing a more speculative viewpoint, noted that novice investors often mislabel a temporary weekly downturn as a full-scale market crash. "A crash can last for two years during which the market struggles to recover," she explained, adding that exposure to innovative sectors can be achieved efficiently through exchange-traded funds (ETFs).

Inflation, Interest Rates, and Artificial Intelligence

Market drivers are currently dictated by a complex interplay of inflation, interest rates, and the profound economic impact of artificial intelligence. Rinat Ashkenazi pointed out that the pendulum swings frequently between these macro vectors. Geopolitical tensions in the Middle East and rising energy costs continue to exert upward pressure on inflation, which in turn influences central bank interest rates and bond yields.

Despite these headwinds, major global economies, including Israel, exhibit resilience. "This is actually the good news: high interest rates are tied to a relatively healthy economic environment, despite ongoing challenges," Ashkenazi stated. Furthermore, massive sovereign deficits accumulated since the COVID-19 pandemic have forced investors to demand higher risk premiums for lending to governments.

Stock markets continue to shatter records primarily due to massive capital injections into AI infrastructure. Companies are raising capital through equity and debt to fund semiconductor manufacturing and data centers. While technology may ultimately help curb inflation over the long term by boosting worker productivity, sustained high yields could force a reevaluation of whether corporate revenues can keep pace with heavy AI investments.

Sector Focus: Semiconductors, Photonics, and Cybersecurity

Kimmelman categorized AI investments into three layers: actual technological outputs, corporate revenues and profitability, and equity valuations. She highlighted the semiconductor industry, particularly the transition from copper-based communication to optical communication known as photonics. Following an initial hype-driven rally and subsequent correction, the photonics sector is stabilizing around tangible industrial applications.

Cybersecurity represents another critical growth area. As autonomous AI agents proliferate across corporate networks, the demand for advanced security solutions scales exponentially. For investors reluctant to analyze individual companies, Kimmelman recommended utilizing themed ETFs spanning semiconductors, photonics, and cybersecurity.

Asset Allocation: Wall Street vs. Tel Aviv

Discussing geographical allocation, Bash described the current environment as favorable for equities in both Israel and the United States, supported by solid global growth, tight labor markets, and record corporate profitability. Nevertheless, valuation multiples and geopolitical uncertainties tilt their preference slightly toward the US market.

Ashkenazi emphasized that diversification remains paramount. "When we don't know, we diversify," she advised, recommending a balanced exposure between the local market and Wall Street. She also warned investors against emotional or politically motivated decision-making, urging a strictly analytical approach focused on corporate fundamentals and macroeconomic indicators.

Advice for Young Investors and Black Swan Risks

Addressing younger investors influenced by social media financial influencers, Bash warned against rampant online scams and unregulated stock-touting groups. She stressed the importance of rigorous personal research and consulting licensed professionals rather than acting on viral trends blindly.

Concluding the panel, participants identified a potential global debt crisis as the primary "black swan" risk facing the markets. Ashkenazi warned that soaring sovereign debt and excessive fiscal spending, compounded by competition for capital from AI investments, could trigger severe financial strain. "Most major historical crises stemmed from over-leverage, overspending, and a lack of fiscal discipline. Today, we are closer to that scenario than ever before," she concluded.