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Leumi Capital Markets Report

Weekly Capital Market Review
December 4 - December 11, 2014

 Our main investment recommendations:


  • Yields across the curve in major overseas bond markets are extremely low. Given that we expect them to trend up, albeit gradually, based on the assumption that the global economic recovery is likely to stay on track (particularly in the US), we recommend avoiding the government bonds of the largest developed nations: America, Germany and Japan.


  • We look for somewhat increased volatility in local financial markets, and recommend maintaining exposure to Israeli government bonds of intermediate duration, given that interest rates are expected to remain subdued. At the long end of the yield curve, bonds are overvalued, increasing the risk of holding those maturities.


  • We advise maintaining a balanced mix between fixed-rate and inflation-indexed bonds. The shekel's recent weakness, coupled with the minimum wage hike, is likely to lift inflation into the government's target range sometime during 2015.


  • Equities remain our preferred risk asset. The potential for negative economic developments in Europe and China pose the greatest threats 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.


  • The precipitous fall in the price of oil seen in recent months has sparked selloffs in the shares of global energy companies. Given current valuations, we recommend gaining exposure to the energy sector, in particular the shares of the largest multinationals.


  • The American economy's gradual improvement, together with the shekel's sharp fall against the dollar, is likely to boost the earnings of Israeli exporters focused on the US market. This positive impact should be felt in the fourth quarter of 2014 and first half of 2015, assuming the shekel's exchange rate remains at current levels.


  • Spreads on Israeli corporate bonds have widened modestly in recent months, reflecting the local economy's sluggishness, which is liable to continue over the near term. We recommend maintaining relatively limited exposure to Israeli corporate debt, focusing on intermediate durations of high-rated issues (A+ and above).


  • We advise maintaining nothing but limited exposure to foreign corporate bonds, focusing on low-rated investment-grade debt with intermediate durations. The widening of spreads on American short-dated high-yield (junk) bonds offers a short-term trading opportunity (albeit one involving considerable risk), given the low interest-rate environment, and based on our assessment that default rates are unlikely to spike in coming months.



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