The Tel Aviv Stock Market (TASE) continues to defy the pundits. In 2009, it performed strongly, rising 75%. Less than half way through January 2010, and it is just off its peak of November 2007. Is the future so certain and so bright? 

Start with some fundamentals. Merrill Lynch has just raised its growth forecast for Israel to 3.5% in 2010. Deloitte’s latest survey indicates that Israel’s hightech sector, responsible for the boom of the last few years, is “back on track”. Interest rates are beginning to rise, prompting a return to savings. Unemployment is moving in the right direction. All fairy encouraging.

In her summary of 2009, Esther Levanon, the CEO of TASE, cautioned that stocks in 2010 are not expected to see the same heavy gains. Sver Plotsker, a leading financial commentator, observed in his weekend column that the strong performance of the past few days was not fully justified. Shlomo Maoz, the chief economist of the financial group “Excellence”, has also gone on record to lower expectations for 2010.

And all this comes just when unit trusts / mutual funds have significantly increased their portfolio exposure to stocks and shares. Should we be worried?

News makers thrive on dire warnings, such as a financial crash. That is unlikely at this stage. However, the Israeli economy is continuously exposed to externalities; the effect of expected interest rises in the USA during 2010 or new financial in China. The shekel acontinues to perform well against other currencies, damaging export profitability.

And this summer TASE will complete the switch to a first level stock exchange, moving away from the emerging market sector. One possible effect is that international portfolio mangers may initially down size their Israeli holdings. TASE was often considered a “good bet” in the lower category.

What next? Be careful. Even if the upward pattern continues, 2010 is unlikely to be one solid path to new riches.