Global bond markets were relatively calm this week, following two weeks of sharp yield rises at the long end of major overseas government bond curves—Israel’s included. From a broader perspective, yields in major overseas markets are still exceedingly low across the maturity spectrum and are expected to gradually trend up over the medium term, assuming the global economic recovery remains on track, particularly in the US. We therefore recommend that investors avoid the government bonds of the largest developed nations: the US, Germany and Japan.
In our judgment, the Israeli economy is gradually moving away from falling consumer prices to a modest rise in the CPI—a scenario only partially priced into local bonds at present. We consequently favor inflation-linked over fixed-rate bonds, and continue to recommend that investors focus on intermediate durations.
Equities remain our preferred risk asset, even though valuations are elevated by historical standards. We nevertheless recommend maintaining relatively high exposure to shares, particularly overseas equities. Moreover, the modest improvement expected in the Israeli economy in coming months argues in favor of establishing positions in local shares.
Holding cash or its equivalents is an important way of keeping portfolio risk at reasonable levels. We recommend maintaining high exposure to this asset class as a means of offsetting the risks associated with the high exposure to shares.
We continue to recommend maintaining relatively limited exposure to Israeli corporate bonds, focusing on short to intermediate maturities of high-rated issues (A+ and above).
The risk premium on Israel corporate bonds with low credit ratings (i.e., high yield, or junk, bonds) has risen over the past six months. But the improvement in Israel’s economy and the low interest-rate environment reduce the risks associated with this asset class. We therefore recommend taking a position in these securities, as a high-risk holding. However, investors should be selective, and avoid investing in indices that track this asset class.
The factors exerting upward pressure on the shekel are likely to persist over the near term. We recommend reducing exposure to the dollar by, amongst other means, putting hedges in place.
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