Leumi Capital Market Review
Our main investment recommendations:
- The latest economic data point to a modest improvement in the global economy, and inflation is gradually edging up in the world’s major countries. These trends, should they continue, could set the stage for the gradual transition towards less accommodative monetary policies than those seen in recent years, and have a major impact on Israel’s economy as well. Moreover, rising interest rates could lead to changes, over time, in the way all assets classes are priced.
- We recently recommended slightly lengthening the average duration of investor fixed-income holdings in Israeli government bonds and overseas corporate debt, given the more attractive prices now available in these two segments of the bond market, and their ability to generate higher ongoing returns. While investors are advised to lengthen the average duration of their bond holdings, we recommend focusing on short to intermediate maturities, given our assessment that the trajectory of interest rates across the globe (including those in Israel) will continue heading higher in coming years.
- As to corporate bonds in Israel and overseas, we recommend focusing on high rather than low rated issues, given the narrow spreads available on the latter. Moreover, we favor reducing exposure to overseas corporate bonds with credit ratings below investment grade, given their low yields relative to the risk levels associated with the securities.
- We recommend that investors increase their exposure to local stocks. Israeli corporate profits are expected to rise, given the outlook for solid growth in the local economy, a strong labor market, and projections that the Bank of Israel is unlikely to raise its policy rate in coming months. As an additional plus, the valuations on Israeli shares are more attractive than their overseas counterparts. For these reasons, we advise slightly overweighting Israeli shares relative to overseas stocks.
- We recommend maintaining an average level of exposure to equities. While significant changes in US fiscal policy could boost corporate profits over the longer term, they could also be accompanied by economic risks worldwide, such as reduced global trade, a further rise in government debt levels, higher inflation, and currency risks, amongst others. Given the elevated valuations of all other asset classes, we continue advising that equities make up the main component of investor portfolios.
- The gap between the US 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. We advise that investors gain forex exposure by investing in overseas stocks and corporate bonds, while refraining from putting currency hedges in place.
- It’s critical that investors find the right balance between risk assets (shares, commodities, and corporate bonds) and highly liquid assets and government bonds, with the aim of creating a safety cushion, thereby maintaining portfolio risks at reasonable levels.
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