Yields on the long-dated bonds of major overseas governments, and in consequence those in Israel, are likely to continue rising over the medium term (i.e., the next two to three years) if America’s economy continues recovering, and to a lesser extent Europe’s. The continued scaling back of the Federal Reserve's quantitative easing program bolsters this assessment.
We advise avoiding the government bonds of the major developed nations—the US, Germany and Japan.
We recommend maintaining high exposure to Israeli government bonds, focusing on short and intermediate durations in a balanced mix between fixed-rate and inflation-indexed bonds.
We recommend maintaining limited exposure to foreign corporate debt, focusing on the short- and medium-dated bonds of companies with low credit ratings (hence higher risks and yields). The rise in yields at the middle of the curve, coupled with our assessment that no rapid yield rise is likely in the foreseeable future, provides justification for diverting part of client holdings in this asset class to bonds with intermediate durations. We also recommend reducing credit risk to some extent by moving into higher-rated bonds.
In the Israeli corporate bond market, narrow spreads fail to adequately reflect the risks inherent in these securities. Investors are therefore advised to maintain nothing but a low allocation in this asset class, focusing on the short-dated bonds (no more than three years out) of companies characterized by positive cash flow and mid-level investment-grade ratings.
We advise being highly exposed to equities (particularly overseas stocks), based on the assessment that valuations on shares across the globe are more attractive than those for corporate bonds. It’s worth emphasizing, however, that stock-market risks increase as price-earnings multiples rise—an assessment that equally applies to shares in Israel, where stocks have rallied over the past two years primarily fueled by rising P/E ratios rather than growth in corporate profits.
We continue recommending that investors overweight shares in Europe and the UK (which make up around 25% of the MSCI World Index), and are currently of the view that the impact of events in Ukraine are a passing phenomenon. We also recommend being slightly underweight US shares (which comprise roughly half the index), as well as maintaining positions in emerging market index funds in equal proportion to their weighting in the MSCI World Index.
The full article is presented in pdf format and can be viewed with Adobe Acrobat Reader software. Install the software
File not opening? Please disable pop-up blocking for this site.