Leumi Capital Market Review
Our main investment recommendations:
- Italy is holding a referendum on Sunday whose outcome could affect financial markets in the coming week—the Italian markets, in particular, including the country’s government bonds, equities, and corporate debt (especially the bonds of Italian banks). We advise that investors refrain from adjusting their portfolios in the run-up to the referendum, given that current prices of Italian financial assets already reflect a variety of potential outcomes.
- American and European economic data released this week continue pointing to modest improvement, including the gradual rise in inflation and a healthier jobs market. Monetary policy in major global economies will remain accommodative, but less so than in recent years. We expect the Federal Reserve to raise its policy rate at a modest pace, though a bit faster than markets apparently anticipate. Low interest rates generally contribute to rising debt levels amongst households and corporations, leading to a gradual increase in overall financial risks.
- US Treasury bond yields kept rising this week, lifted by positive economic data, the market’s reassessment of the trajectory of US interest rates, and expectations that the Trump administration will adopt an expansionary fiscal policy that will push up inflation. In Israel’s sovereign debt market, the rise in US Treasury yields continued exerting upward pressure on local yields.
- Government bonds are overvalued globally, even after the recent weeks’ sharp rise in yields. We continue recommending that investors position their fixed-income holdings in short to intermediate durations.
- As to corporate bonds in Israel and overseas, we recommend focusing on high rather than low rated issuers, given the narrow spreads available on the latter.
- We recommend maintaining an average level of equity exposure. While significant changes in US fiscal policy could result in higher corporate profits over the longer term, they could also be accompanied by global economic risks, such as reduced global trade, a further rise in government debt levels, higher inflation, and currency risks, amongst others. Given the high prices in all other asset classes, we continue recommending equities as the main component of investor portfolios, particularly shares in the high-tech, financial, industrial, and transport sectors. It’s fair to assume, though, that given the strong rallies in those sectors since the US elections, they may undergo something of a short-term correction.
- It’s critical that investors find the right balance between risk assets (shares, commodities, and corporate bonds) and highly liquid assets and government bonds. The aim is to create a safety cushion, thereby maintaining portfolio risks at reasonable levels.
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