The World’s Strongest Currency

The Israeli shekel has arguably been the strongest currency in the world against all major currencies over the last 15 years.
South Africans planning on a future or investing in Israel have a double-edged currency problem. Not only are they trying to protect their Rand-based wealth from a depreciating Rand by investing in USD or GBP, but they have also had to face a strengthening shekel too. Converting your Rand into USD over the last ten years has not been enough to protect your purchasing power in Israel. In 2004, 1 Shekel would have bought R1.3 and, in 2022, R5.13! (currently 4.7). Over that period, the Rand/USD rate depreciated 2.4 times, and the Rand/Shekel rate depreciated nearly four times.

One of the most basic financial planning principles is matching your assets to your future liabilities.
The legacy of the collapsed shekel of the early 1980s and the geopolitical realities of Israel hang over many skeptical heads and has prevented Olim from converting their wealth to shekels. Over the last 25 years, Israel has dealt with wars, military campaigns, terrorism, the second intifada, significant internal political instability and Covid19, and yet the shekel has still been on an incredible strengthening trend. Immigrants to Israel are not familiar with the language and culture of investing in Israel, in addition many were incentivized to stay in foreign currency because of the 10-year tax holiday available to new immigrants. The result is that many immigrants are heavily underinvested in shekels. This has cost them dearly in terms of shekel purchasing power. One would be wise to learn from their mistakes.

Why is the shekel so strong?
Better-known reasons include the massive inflow of capital into the tech sector, disciplined government fiscal management, and generally strong economic growth. However, other causes are likely to be even more significant. Firstly, there are the gas exports from the enormous gas reserves in the Mediterranean ocean that have only really started in the last few years. Secondly, and in my opinion, the most significant reason for the strong shekel is institutional hedging. Israel has very high compulsory saving laws. For example, if a company employs someone for a gross salary of 10,000 nis per month, then the cost to the company is about 30% more for pension, severance, and educational fund saving contributions by the employer, in addition to contributions made by the employee. Across the Israeli economy, with over 4.5 million employed people, this means that every month the long-term savings industry grows by billions of shekels. The local fund managers who manage these vast amounts of money have been allowed to invest a growing portion of these assets outside Israel. However, they do not want the currency exposure, so they hedge it back to the shekel, which effectively means they are buying billions of shekels every month to hedge their currency exposure.

To see the impact of this, look at March 2020.
As the global stock markets crashed significantly due to Covid fears, so did the amount of USD needed to be hedged daily. As these hedging positions were unwound and shekels were sold, the shekel weakened in a matter of days from 3.45:1 to 3.83:1, and then by mid-April climbed back to 3.5:1. During that critical period, not much else was happening, so we can attribute these huge swings in the rate to the reversal of hedging activity. As the Israeli economy continues to grow, the amount of money being invested abroad and hedged back to shekels is likely to increase. This creates enormous, continued demand for the shekel. The unknown factor is to what extent the Bank of Israel (BOI) will intervene in the market to protect the economy from a shekel that is too strong, something which they regularly do. If they didn’t intervene you can be sure the shekel would be even stronger. Currencies always have two sides contributing to the rate, the shekel is not the only player here. The USD is still by far the world’s reserve currency and is likely to remain so. However, Covid-19 has seriously changed the quality of the USA government balance sheet, so while the USD is still far ahead, there is long-term pressure weakening the USD that will also contribute to the shekel’s relative strength. We can debate the relative contribution of the above points, but the bottom line is this: All the reasons for the strong shekel, whatever they may be, are permanent and not temporary. Therefore, we should expect the shekel to stay strong and probably likely to continue to strengthen.

What does this mean for those outside Israel looking to invest?
If you see future expenditure in Israel or wish to hold foreign currency in another currency that is not the USD, GBP or CHF, then you can start to build up a portfolio of shekel investments. Even if your future plan is to buy a property in Israel, you need to build up the resources in shekels so that when you find your dream property you are not vulnerable to the rate on that day. Too many property buyers have been caught relying too much on luck.

Historically the main investment made by South Africans in Israel has been property.
However, there are many other options to invest in shekels. In addition to investing in Israeli companies, one could purchase exposure to USA equities and be fully hedged back to shekel. Other liquid and semi-liquid solutions exist in the form of a managed portfolio or institutionally supported funds, very similar to the managed portfolio and funds you may have through one of the well-known South African financial services firms. Currencies are very difficult to predict in the short term, but we do recommend that investors think about currency strategically. Given the arguments stated above, that would mean for many of the JR readers building up a meaningful percentage of your offshore wealth in shekels instead of the traditional USD or GBP. With over 35 years of experience, Pioneer Wealth Management Israel provides independent and holistic wealth management services to families, business professionals, and individuals, in Israel and abroad.

Find out how we can provide you with solutions, including shekel portfolios, by contacting us at info@piowealth.com