Leumi Capital Market Review
Our main investment recommendations:
- Data on Israel’s gross domestic product indicate the economy continues expanding against a backdrop of slowly rising inflation and persistent upward pressure on the shekel’s exchange rate, which should enable the Bank of Israel to maintain its policy rate at near-zero levels, for the meantime. Taken together, these factors could provide continued short-term support for local financial markets.
- Data on the global economy indicate continued improvement, while inflation in the world’s major economies is clearly edging higher. If these trends persist, they could set the stage for the gradual transition away from the ultraloose monetary policies of recent years, and have a major impact on Israel’s economy, as well. Moreover, rising interest rates over the medium term have the potential to engender changes in the way all assets classes are priced.
- For fixed-income portfolios, we advise that investors maintain equal exposure to fixed-rate and CPI-linked bonds. While we anticipate inflation will edge up in coming months, we project a faster increase than the markets currently expect. This assessment is based on our outlook for aggregate demand, rising inflation overseas, and technical factors stemming from the way inflation is measured. That said, the pace of the CPI’s ascent may be tempered by the strong shekel and potential tax cuts.
- We recommend that investors keep their bond portfolios focused on short to intermediate durations, given our forecast that the global trajectory of interest rates (including those in Israel) will continue trending higher in coming years. As to corporate bonds in Israel and overseas, we recommend high rather than low rated issues, given the narrow spreads available on the latter.
- As to equities, we recommend maintaining an average level of exposure to this asset class. While significant changes in US fiscal policy could boost corporate profits over the longer term, they could also set off global economic risks, such as reduced international trade, a further increase in government debt levels, stepped-up inflation, and currency risks. Given the elevated valuations of all other asset classes, we recommend that equities continue to make up the main component of investor portfolios.
- We advise that investors gain significant exposure to local stocks. Israeli corporate earnings are expected to rise, given the outlook for the faster pace of growth in the local economy, its healthier composition, the strong labor market, and our forecast that the Bank of Israel is unlikely to raise its policy rate in coming months. As an additional plus, valuations on Israeli shares are more attractive than their overseas counterparts. That said, investors should be selective in choosing Israeli stocks and refrain from investing in index-linked products, given our downbeat outlook for a number of the indices’ constituent parts that have a relatively high weighting in local index-linked products.
- The gap between the Federal Reserve’s benchmark interest rate and that of the Bank of Israel is expected to widen in 2017, which could lead to heightened exchange-rate volatility, and lessen the underlying pressures for the shekel’s appreciation. We advise that investors gain forex exposure by investing in overseas stocks and corporate bonds, while refraining from putting currency hedges in place. This recommendation is based, in part, on the potential for currency exposure to lower the overall volatility of investment portfolios.
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