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Leumi Capital Markets Report

Weekly Capital Market Review
April 16-22, 2015

Our main investment recommendations:


  • Israel’s consumer price index for March, released last week, may be signaling a gradual transition away from declining inflation to mildly rising prices. Given that the bond market has yet to fully price in this scenario, we recommend favoring CPI-linked bonds to their fixed-rate counterparts.


  • The dollar’s sharp rise over the past year against major rivals has started affecting the US economy, pressuring not only exports but inflation as well (import prices have fallen). These developments reduce the odds of the dollar rising further. In consequence, we advise that investors reduce their exposure to the American currency—by heading, amongst other means.


  • Equities remain our preferred risk asset, even though valuations are elevated by historical standards. We nevertheless recommend maintaining relatively high exposure to shares, particularly overseas equities. Moreover, the slight improvement expected in Israel’s economy this year argues in favor of establishing positions in local shares.


  • Maintaining cash or its equivalents is an important way of keeping portfolio risk at reasonable levels. We recommend maintaining high exposure to this asset class, and even expanding it, as a means of offsetting the risks associated with high stock-market exposure. We also recommend choosing carefully between the various cash-like instruments available, given that the Bank of Israel’s near-zero interest rate and the interest-rate trajectory currently priced into the market have resulted in ultralow expected returns for conservative, cash-equivalent financial products. The lower potential gains from investing in these instruments (after taking into account transaction costs, management fees, and add-on rates) could render some of these investments unattractive in terms of buying and holding them.


  • Bond yields in major overseas markets, while extremely low across the curve, are expected to gradually move up, assuming the economic recovery across the globe continues, particularly in the US. We therefore recommend that investors refrain from investing in the government bonds of the largest developed nations: the US, Germany and Japan.


  • We continue to recommend maintaining relatively limited exposure to Israeli corporate bonds, focusing on short to intermediate maturities of high-rated issues (A+ and above). We also recommend expanding holdings in the intermediate-dated bonds of Israeli banks as a partial alternative to government bonds, given the low interest-rate environment and the fact that the current yield spread between bank and government bonds more than compensates for the banks’ credit risk.


  • Low global demand for commodities implies their prices are unlikely to turn up for now. Moreover, the Federal Reserve’s expected interest-rate hike later in the year may create an additional drag on commodity prices. We therefore advise against maintaining anything but limited direct exposure to this asset class.

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