Weekly Capital Market Review
January 8 - January 15, 2015
Our main investment recommendations:
Volatility in global financial markets has increased in recent weeks as prices of risk assets have fallen and those of safe havens risen. The reasons behind these developments include growing doubts about the growth prospects in a number of major economies, and dramatic developments in the global energy sector and Russian economy. For now, we're not expecting a shift in the direction of the global economy. Falling oil prices, it's worth recalling, carry benefits: consumers are left with more disposable income and corporations enjoy reduced costs. We therefore advise investors to avoid making significant adjustments to their portfolios at this point in time.
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 interest rates are likely to remain subdued in coming months. The negligible yields available on short-dated maturities render that end of the yield curve unattractive, while bonds at the long end of the curve are overvalued, increasing the risk of holding those securities.
Equities remain our preferred risk asset, even though valuations aren’t cheap.
The US economy's gradual improvement, together 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, but only on a limited number of bonds. Seeing that corporate bond prices haven’t come down across the board, we recommend maintaining nothing but relatively limited exposure to this asset class, focusing on short to intermediate durations of high-rated issues (A+ and above).
We also advise investors to maintain only limited exposure to overseas corporate bonds, focusing on low-rated investment-grade debt with intermediate durations.
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