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Leumi Capital Markets Report

Weekly Capital Market Review
September 4 - September 11, 2014

Our main investment recommendations:


  • We expect yields on the bonds of major overseas governments to climb incrementally over the medium term, assuming the global economic recovery continues, particularly in the US. Accordingly, investors are advised to avoid the government bonds of the largest developed nations—America, Germany and Japan.


  • Equities remain our preferred risk asset, and we recommend significantly overweighting overseas shares, given that Israel's economy is experiencing weak aggregate demand. In foreign equities, we have a market-weight rating on the US and European markets, and recommend overweighting emerging-market equities and underweighting Japanese shares.


  • In US stocks, we favor sectors likely to prove less vulnerable to rising interest rates—high-tech, financials, and energy. We recommend avoiding the real estate sector and companies sporting very high dividend yields, since both are likely to prove particularly vulnerable to rising interest rates.


  • We advocate maintaining limited exposure to overseas corporate bonds, focusing on low-rated investment-grade debt with intermediate durations. We recommend avoiding speculative-grade bonds, whose spreads are still too narrow for their inherent risk.


  • We recommend maintaining high exposure to Israeli government bonds, focusing on 5-year durations. With yields on short-dated bonds approaching zero, this segment of the curve is no longer a desirable investment. At the long end of the curve, rich valuations have increased the risk of holding those maturities.


  • Since yield spreads on Israeli corporate bonds remain narrow, we advise maintaining nothing but a limited allocation to this asset class, focusing on the short- to medium-term bonds of companies characterized by positive cash flow and mid- to high-level investment-grade ratings.


  • While the short-term impact of recent hostilities on Israel's economy was limited, the combination of sluggish economic growth (which preceded the outbreak of strife) and the hostilities' potential third-quarter impact on the local economy, have increased financial-market risk. In consequence, we recommend maintaining nothing but relatively low exposure to Israeli stocks and corporate bonds.


  • The shekel's decline against the dollar in recent weeks is a product of the greenback's strength across the globe in addition to local developments. If the shekel's exchange rate remains at current levels, it could nudge up inflation in coming months, which, in turn, would provide support for our recommendation that investors maintain around half their bond holdings in inflation-indexed securities. We also continue advising that investors maintain some exposure to foreign currencies.


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