Weekly Capital Market Review
November 13 - November 20, 2014
Our main investment recommendations:
Yields across the curve in major overseas bond markets are extremely low. Given that we expect them to rise, albeit at a gradual pace, assuming the global economic recovery stays on track (particularly in the US), investors are advised to avoid the government bonds of the largest developed nations: America, Germany and Japan.
We recommend maintaining exposure to Israeli fixed-rate sovereign debt, focusing on 5-year durations, seeing that interest rates in coming months are expected to remain low. With yields on short-dated bonds approaching zero, the short end of the yield curve is no longer attractive. At the long end of the curve, bonds are overvalued, increasing the risk of holding those maturities. Investors may want to lengthen the duration on their CPI-linked government bond holdings, given that low inflation expectations should reduce the negative impact of rising yields, if the pace of inflation does eventually pick up.
Equities are still our preferred risk asset. The potential for negative economic developments in Europe and Japan pose the greatest threat to shares. We recommend significantly overweighting overseas equities in light of the weakness in Israeli aggregate demand. In foreign stocks, we have a market-weight rating on the US and European markets, and recommend overweighting emerging-market shares, while underweighting Japan.
Weak aggregate demand in Israel, and the shekel's sharp depreciation against the dollar in recent months, are the reasons investors should favor local export-oriented companies for the Israeli component of their equity holdings.
Spreads on Israeli corporate bonds aren't wide, but offer relatively attractive yields in the current low interest-rate environment. Given the state of the Israeli economy at present, spreads could widen even further. We advise maintaining nothing but limited exposure to local corporate bonds, favoring medium-term debt with high credit ratings of A+ and above.
We recommend maintaining only limited exposure to foreign corporate bonds, focusing on low-rated investment-grade debt with intermediate durations. The widening of spreads on American short-dated speculative-grade (junk) bonds offers a near-term trading opportunity (albeit one involving considerable risk), owing to the low interest-rate environment, and based on the assumption that default rates aren't likely to accelerate in coming months.
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