he continued recovery of the global economy in 2010 positively influenced the financial systems and investment houses operating in Israel. In 2009, there had been a sharp turning point in the activities of the banking system and financial companies. This helped them recover from the harsh global crisis and this trend continued in 2010 at a swifter rate. The economy was also buoyed by rising in the stock and bond market, which contributed to the positive atmosphere.
Despite the improvement, the troubles of Europe's PIIGS countries deteriorated in financing public debt. The current concern is that if the crisis in these countries worsens, there will be repercussions for the European banking system. The EU and IMF have succeeded in moderating the strength of the crisis by forming an aid plan for the troubled countries. However, if the crisis is not solved in 2011, with the spotlight mainly on Greece, it will be hard to implement the emergency economic measures demanded by the states and financial bodies providing the financing.
The low level of interest worldwide in 2010 created a global liquidity surplus, and renewed the flow of capital from developed countries to emerging countries in an attempt to achieve higher returns on investments. Part of the capital flow was to the Israeli economy, partly due to the rise in interest rates by the Bank of Israel since Q4 2009. The accelerated economic growth of the Israeli economy through the banking system was expressed in a rise in credit to businesses. The bond market, which was frozen for a period of two years, was again opened to companies to raise capital at relatively low interest rates. The combination of these factors contributed to a rise in the stock market and increased exposure by the public to the stock market.
Israel's investment houses and banking system face no small number of risks that might slow activity in 2011 such as concerns over rising inflation and dependence on global economic activity, augmenting the need to navigate focused risks, while adopting a conservative investment policy. Other factors include concerns over a real estate bubble, the rise in the interest rate and regulatory changes.
Domestic Capital Market Performance
Israeli investment houses are llargely dependent on the behavior of the capital market. The 16 leading investment houses accrued assets worth NIS 500 billion by the end of 2010. The weakness of the capital market and the fall in share and bond prices has reduced the assets managed alongside mutual fund redemptions. This fall erodes the management fees earned by the investment houses and reduces profitability.