Leumi Capital Market Review
Our main investment recommendations:
- Recent data indicate that Israel’s economy continues expanding against a backdrop of slowly rising inflation and persistent upward pressure on the shekel. These factors, taken together, should enable the Bank of Israel to keep its policy rate at near-zero levels for the meantime, and could continue providing short-term support to local financial markets. Intel’s acquisition of Mobileye provides an additional boost to market sentiment, and given the deal’s size will even impact Israel’s macroeconomic backdrop in the form of higher tax revenues and will also affect capital flows.
- Data on the global economy point to continued improvement, while inflation in the world’s largest economies is clearly edging higher. The positive trends in financial markets could well continue for the foreseeable future. However, if the trends persist, they could set the stage for the gradual transition away from the ultraloose monetary policies of recent years. Moreover, interest-rate increases could engender changes over time in the way all assets classes are priced. We recommend that investors refrain from increasing the level of risk in their portfolios, because valuations on stocks and corporate bonds, in Israel and abroad, are high by historical standards.
- For fixed-income portfolios, we advise that investors maintain equal exposure to fixed-rate and CPI-linked bonds. We project that inflation will edge up in coming months, but could do so more quickly than markets currently expect. This assessment is based on our outlook for aggregate demand, rising inflation overseas, and technical factors associated with the way inflation is measured. That said, the pace of the CPI’s ascent could be tempered by the strong shekel as well as potential tax cuts.
- We recommend that investors keep their bond portfolios positioned in short to intermediate durations, given our forecast that the trajectory of global interest rates (including those in Israel) will continue trending higher in coming years. As to corporate bonds in Israel and abroad, we recommend high rather than low rated issues, given the narrow spreads available on the latter.
- We recommend maintaining an average level of exposure to equities. That said, the risks posed by shares keep rising as major stock indices across the globe continue rallying strongly. For now, owing to the elevated valuations in all other asset classes, we’re recommending that equities remain the main component of investor portfolios and that investors gain significant exposure to Israeli shares, given that corporate earnings are expected to rise, thanks to the outlook for the local economy’s faster pace of growth, its healthier composition, Israel’s strong labor market, and our expectation that the Bank of Israel is unlikely to raise its policy rate in coming months. As an additional plus, valuations on Israeli shares are more attractive than their overseas counterparts. However, investors should be selective in choosing Israeli stocks, and refrain from investing in general index-linked products, either in Israel or overseas.
- The gap between the Federal Reserve’s benchmark interest rate and that of the Bank of Israel is expected to widen in 2017, which could lead to heightened exchange-rate volatility, and reduce the underlying pressures for the shekel’s appreciation. We advise that investors gain forex exposure by investing in overseas stocks and corporate bonds, while refraining from putting currency hedges in place. This recommendation is based, in part, on the potential of forex exposure to reduce the overall volatility of investment portfolios.
- It’s critical that investors find the right balance between risk assets (shares, commodities, and corporate bonds) and highly liquid assets and government bonds, with the aim of creating a safety cushion, thereby maintaining portfolio risks at reasonable levels.
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