Leumi Capital Market Review
Our main investment recommendations:
- Recent data point to a modest improvement in the global economy, while inflation is gradually edging up in the world’s major economies. If the trends persist, they could set the stage for the gradual transition away from the loose monetary policies of recent years, and have a major impact on Israel’s economy, as well. Moreover, rising interest rates have the potential to create changes, over time, in the way all assets classes are priced.
- For fixed-income portfolios, we now advise that investors gain equal exposure to fixed-rate and CPI-linked bonds, following a period in which we favored fixed-rate debt. While we anticipate inflation will edge up modestly in coming months, we project a faster increase in consumer prices than the markets currently expect. This assessment is based on our outlook for aggregate demand, rising inflation overseas, and technical factors associated with the measurement of inflation in January and February. That said, the pace of the CPI’s ascent may be tempered by the strong shekel and potential tax cuts.
- Regarding bond portfolios, we advise that investors focus on short to intermediate durations, given our forecast that the trajectory of interest rates across the globe (including those in Israel) will continue heading higher in coming years. As to corporate bonds in Israel and overseas, we recommend focusing on high rather than low rated issues, given the narrow spreads available on the latter. Moreover, we advise maintaining nothing but minimal exposure to overseas corporate bonds with sub-investment-grade credit ratings, owing to their low yields relative the risks associated with the securities.
- We recommend maintaining an average level of exposure to equities. While significant changes in US fiscal policy could boost corporate profits over the longer term, they could also set off global economic risks, like reduced international trade, a further rise in government debt levels, stepped-up inflation, and currency risks, amongst others. Given the elevated valuations of all other asset classes, we advise that equities continue to comprise the main component of investor portfolios.
- We recommend that investors gain significant exposure to local stocks. Israeli corporate profits are expected to rise, given the outlook for solid growth in the local economy, the strong labor market, and our view 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. But investors should be selective in choosing Israeli stocks and avoid investing in index-linked products, given our unfavorable assessment regarding a number of the indices’ constituent parts that have a relatively high weighting in local index-linked products.
- The gap between the US 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. We advise that investors gain forex exposure by investing in overseas stocks and corporate bonds, while refraining from putting currency hedges in place.
- 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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