Weekly Capital Market Review
September 25- October 2, 2014
Our main investment recommendations:
Yields across the curve of major overseas bond markets are extremely low, and we expect them to gradually rise, assuming the global economic recovery stays on track, particularly in the US. Accordingly, investors are advised to avoid the government bonds of the largest developed nations—America, Germany and Japan.
Equities remain our preferred risk asset, and we advise significantly overweighting overseas shares, given that Israel's economy is experiencing weak aggregate demand. In foreign equities, we have a market-weight rating on the US and European markets, and recommend overweighting emerging-market shares and underweighting Japan. One of the factors responsible for the past month's declines in major global stock indices is the growing concern over Europe's economy. For the present, however, we see no reason for investors to adjust the composition of their equity holdings.
In US stocks, we favor high-tech, financials, and energy—sectors likely to prove less vulnerable to rising interest rates. We recommend avoiding the real estate sector and companies sporting very high dividend yields, given that both are likely to prove especially vulnerable to rising interest rates.
We recommend maintaining high exposure to Israeli government bonds, focusing on 5-year durations. Given that yields on short-dated bonds are approaching zero, the short end of the yield curve is no longer attractive. At the long end of the curve, bond prices are overvalued, increasing the risk of holding those maturities.
Over the past few months, spreads on Israeli corporate bonds have widened modestly, reflecting the slowdown in the local economy (which is liable to continue over the short term), and against the backdrop of hefty corporate bond issuance. Given the low yields currently available in the local market, corporate bonds' wider spreads are now attractive, and we recommend modestly expanding exposure to them, particularly intermediate durations with high credit ratings (A+ or higher), while simultaneously reducing exposure to inflation-indexed government debt. Even after making these adjustments, however, the corporate bond allocation in our recommended portfolio is still relatively low.
We advocate maintaining nothing but limited exposure to overseas corporate bonds, focusing on low-rated investment-grade debt with intermediate durations. We recommend avoiding speculative-grade (junk) bonds, whose spreads are still too narrow for their inherent risk.
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