Weekly Capital Market Review
November 14-November 21, 2013
Our main investment recommendations
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.
We advise avoiding the government bonds of the major developed nations (the US, Germany and Japan).
We recommend holding Israeli government bonds, focusing on short to intermediate durations. At the short end of the curve, we prefer CPI-linked bonds, even though the inflationary environment is expected to remain subdued, based on our assessment that inflation expectations, as reflected in the local bond market, are too low for this timeframe.
We recommend that investors hold nothing but a low percentage of their portfolios in foreign corporate debt, focusing on the short-dated bonds of companies with low credit ratings (hence higher risks and yields). The rise in yields on intermediate-dated bonds, coupled with our view that no rapid spike in yields is likely from this point onward, provides justification for diverting part of client corporate bond holdings to bonds with intermediate durations.
In Israel’s corporate bond market, narrow spreads over government debt fail to adequately reflect the risks inherent in corporate bonds. In consequence, investors are advised to maintain nothing but a low percentage of their portfolios in this asset class, and that the bonds they do hold be the short-dated securities (no more than three years out) of companies characterized by positive cash flow and mid-level credit ratings. For investors whose portfolios contain a high percentage of Israeli corporate bonds, we recommend taking advantage of this period of tranquility to reduce exposure to this asset class.
We advise that investors be highly exposed to foreign equities, based on our assessment that valuations on stocks across the globe are more attractive than those for corporate bonds. It’s worth recalling, however, that risks in stock markets increase as price-earnings multiples rise.
In light of the improved conditions in Europe and Britain, we recommend overweighting the equity indices of those regions, which make up around 25% of the MSCI World Index. We also recommend being slightly underweight US shares (which comprise around half the index), as well as maintaining positions in emerging market index funds in equal proportion to their weighting in the MSCI World Index.
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