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Leumi Capital Markets Report

Weekly Capital Market Review
January 15 - January 22, 2015

Our main investment recommendations:


  • Yields, while extremely low across the curve in major overseas bond markets, are expected to gradually trend up, assuming the global economic recovery stays on track (particularly in the US). We consequently recommend that investors keep their distance from the government bonds of the largest developed nations: America, Germany and Japan.


  • We advise maintaining exposure to Israeli government bonds of intermediate duration, given that consumer prices in the first quarter of 2015 are expected to drop, and the Bank of Israel's policy rate will likely remain extremely low for the next few months. The negligible yields available on short-dated maturities render that end of the yield curve unattractive.


  • The quantitative easing program the European Central Bank announced on Thursday could contribute to the decline in Israeli government yields over the near term. Investors might therefore want to diversify their government debt holdings by taking positions in long-dated bonds—but only as a trade, not a long-term investment, given that bonds at the long end of the curve are overvalued and entail considerable risk.


  • Equities remain our preferred risk asset, even though valuations aren’t cheap.


  • The US economy's gradual improvement, coupled with the shekel's sharp fall against the dollar, is likely to boost the earnings of Israeli exporters whose primary target is the US market. The impact on earnings should be felt in the fourth quarter of 2014 and first half of 2015.


  • Oil prices have plummeted in recent months, dragging down the shares of energy companies across the globe. Given current valuations, we recommend gaining exposure to the energy sector, in particular the shares of the largest multinationals.


  • Spreads on Israeli corporate debt have widened in recent months. We continue advising that investors maintain nothing but relatively limited exposure to this asset class, focusing on short to intermediate durations of high-rated issues (A+ and above).


  • We recommend that investors sell some of their holdings in high-rated Israeli corporate bonds (whose prices have barely fallen in recent months) and reinvest the proceeds in US corporate bonds with similar credit risks (keeping in mind the differences between the credit-rating scales in the US and Israel), owing to the more attractive valuations available in the US corporate bond market.


  • Global demand for commodities is subdued at present, exerting downward pressure on all commodity prices. In consequence, we advise against maintaining anything but limited direct exposure to this asset class.



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