Leumi Capital Market Review
Our main investment recommendations:
- The global economy is expected to grow this year, albeit at a tepid pace. Monetary policy in the world’s major economies will remain accommodative, but less so than in recent years. America’s Federal Reserve is likely to raise its policy rate at a slow pace. Low interest rates, as a general rule, contribute to rising debt levels amongst households and corporations, implying a general if gradual rise in overall financial risks.
- Government bonds are overvalued globally. As to Israeli and overseas corporate bonds, 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. Modest global economic growth is likely to result in nothing but modest corporate earnings growth in the second half of 2016, and based on that prospect, we don’t expect strong rallies in major global equity indices this year. But given the current high valuations of all other asset classes, equities remain the main component of our recommended investment portfolio. As to foreign equities, we recently recommended that investors trim their holdings in certain defensive sectors (like utilities, REITs, and consumer staples), while modestly increasing exposure to growth sectors that offer more attractive valuations. This move, however, entails slightly higher portfolio risks.
- We recommend that investors increase their exposure to Israeli shares, while reducing their holdings in Israeli corporate bonds. In our view, the odds of spreads on local corporate bonds narrowing significantly are limited, while the yields available on those securities are generally low. It’s noteworthy that Israel’s economy continues growing and that valuations on local equities are reasonable compared with those in foreign markets.
- We recommend modestly reducing exposure to overseas shares, given their somewhat elevated valuations and a growing number of factors that could lead to heightened short-term volatility. These factors include the US elections, the odds of a December interest-rate hike by the Fed, shifting perceptions over the direction of monetary policy by the central banks in Europe and Japan, and third-quarter earnings season, which is just around the corner.
- Given this analysis, and following an extended period in which we’ve favored overseas to local equities, we now recommend that investors establish an equal balance in their portfolios of foreign and local equities. In addition to the slightly more attractive valuations available in the Israeli market, we believe that the negative factors weighing on pharmaceutical shares, which comprise a heavy weighting in local indices, are likely to lift over the medium term (though they could continue over the short term).
- 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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