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Leumi Capital Market Review

Review for the week of:
Sept. 15-22, 2016

Our main investment recommendations:

 

 

  • While the global economy is expected to keep growing this year, the pace is likely to continue at the same rate seen in 2015. Amongst the factors threatening global growth are possible negative developments in China’s economy and uncertainties associated with Britain’s exit from the European Union. Shifting expectations regarding the direction of interest rates in the US, and the country’s upcoming elections, will likely be the focus of investor attention in coming months.

 

  • Monetary policy in the world’s major economies will remain highly accommodative for the foreseeable future, and the pace of US interest-rate hikes is likely to be slow. As a general rule, low interest rates contribute to rising debt levels amongst households and corporations, implying a general if gradual rise in overall financial risks.

 

  • Government bonds are overvalued globally as a consequence of expectations for highly accommodative monetary policies worldwide. Given that sovereign bonds are richly priced, we favor corporate over government bonds. 

 

  • As to corporate bonds in Israel and abroad, we favor high over low rated issuers, given the narrow spreads currently prevailing in the latter.

 

  • We recommend maintaining an average level of equity exposure. Modest global economic growth is likely to result in nothing but modest corporate earnings growth in the second half of 2016, and based on that prospect, we don’t expect strong rallies in major global equity indices this year. But given the current high valuations of all other asset classes, equities remain the main component of our recommended investment portfolio.

 

  • As to overseas equities, we recommend investors sell part of their holdings in sectors deemed defensive (such as utilities, REITs, and consumer staples), while modestly increasing their exposure to growth sectors that offer more attractive valuations. This move, however, entails slightly higher portfolio risks.

 

  • It’s critical that investors find the right balance between risk assets (shares, commodities, and corporate bonds) and highly liquid assets and government bonds. The aim is to create a safety cushion, thereby maintaining portfolio risks at reasonable levels.

 

 

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