What Next for The Shekel?

Over the last twenty years, the Shekel has been one of the world’s strongest currencies. 

Over that time, olim from English speaking countries have seen the value of their home currency fall sharply against the shekel – the British pound by more than 52%, the Australian Dollar by 51%, the Canadian dollar by more than 44% and the US Dollar by 38%.

For those planning to make Aliyah or already living in Israel, thinking about ensuring how they can afford to maintain their lifestyle, the outlook for Israel’s currency is a question of critical importance. 

Local economists agree that the prolonged strength of the Shekel has been based on fundamental trends rather than speculative flows. Understanding the four main factors that have underpinned this multi-year rally and analysing whether they will continue is a key consideration for anyone thinking about this issue. 

1. Probably the biggest factor pushing the Shekel higher has been the role played by Israel’s large pension and savings funds. They are obligated to ‘hedge’ their significant overseas investments back into Shekels to ensure that investors are not unnecessarily exposed to currency risks.  

This means that there is a constant demand to sell Dollars and buy Shekel to meet this need, but there are no large overseas institutions doing the opposite hedge, which means that the push is in one direction only.  

Natti Ginor and the team at the leading global investment bank Jefferies have projected that the pool of Israeli institutional money could rise from 2.5 trillion in 2023 to 4.5 trillion NIS by 2030, which represents a substantial increase. Furthermore, if the domestic market is unable to absorb its current share of this ever-growing amount of capital, a higher percentage of funds will need to be diverted overseas. These developments would make the one-way Shekel hedge of the domestic institutions an even greater factor pushing Israel’s currency up in the coming years.

2.  Israel has the 2^nd largest natural gas reserves in the Eastern Mediterranean. From being entirely dependent on imported fossil fuels, gas exports, which were non-existent as recently as 2019 – have turned Israel into a net energy exporter. Instead of selling Shekels to buy Dollars to purchase oil and coal from overseas suppliers, Israel now has a surplus of foreign currency from exports.

3. As is well known, Israel has established itself as a global powerhouse in the world of technology.  Gone are the days when the fledgling companies that characterised ‘The Start Up Nation’ were sold to overseas buyers and their founders emigrated overseas  

The past few years have been characterised by the titans of global technology - such as Nvidia, Meta, Google, and Microsoft, coming to Israel, buying local businesses, and then investing huge amounts in growing their businesses here.

As the Israeli presence of these companies gets larger, ever-increasing amounts of money are needed to fund deals, purchase office space, pay staff and local suppliers.  Again, this means that these firms have to sell Dollars and buy Shekels to meet much of this expenditure, thus creating further upward pressure on Israel’s currency.

4. Although the two-year war triggered by the atrocities committed by Hamas on October 7th has come at a considerable cost to the local economy, Israel's economic fundamentals remain stronger than most other leading developed countries. 

Whether it’s a faster rate of economic growth than western countries, a growing population at a time when many western countries are dealing with the challenge of declining birth rates to the sound position of the country’s finances (e.g., low Debt to GDP, low unemployment and low inflation), these factors all lead to optimism about Israel which translates into long term confidence in the Shekel.

So, whilst it is impossible to predict short-term currency market movements, most experts agree that the pillars that have made the Shekel so strong are still in place and will be a decisive factor in the coming years.

The problem for olim is that their advisers and asset managers based overseas do not offer Shekel investments. As a result, many clients have effectively been betting against the Shekel by ignoring it when planning their finances and this has been a costly mistake.

Olim are often uncertain about where to turn to for wealth management services in Israel – the culture is different, documentation is in Ivrit and they are unfamiliar with the local market. This can push them away from making the correct investment decisions.

The good news is that there are firms that can meet your expectations, offer face-to-face services and provide all documentation and reports in English, and know how to guide you to invest your money in a way that is most suitable for your new life in Israel. 

For more information, Andrew Album can be contacted at andrewa@piowealth.com.

This content is for general guidance and informational purposes only and is not a substitute for personal wealth management services, which take into account the particular circumstances of each individual. It also should not be considered as legal or tax advice. The writer has provided wealth management advice to individuals and families in the UK  since 1993 and is licensed in Israel under the supervision of the ISA. Pioneer Financial Planning (92) Ltd. holds a Portfolio Management license from the Israeli Securities Authority, is an authorized Financial Services Provider by the South African Financial Services Board and is relying on the international adviser exemption with the Ontario Securities Commission which allows it to deal with permitted clients in Ontario, Canada. Pioneer Administrative Service Ltd. is a Registered Investment Advisor (RIA) that is licensed by the SEC in the USA.