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Leumi Capital Market Review

Review for the week of:
12-19.01.17

Our main investment recommendations:

 

 

  • The latest economic data point to a modest improvement in the global economy, while inflation is gradually edging up in the world’s major countries. Should these trends continue, they could set the stage for the gradual transition towards less accommodative monetary policies than those seen in recent years, and have a major impact on Israel’s economy as well. Moreover, rising interest rates could lead to changes, over time, in the way all assets classes are priced.   

 

  • In fixed-income portfolios, we recommend focusing on short to intermediate durations, given our assessment that the trajectory of interest rates across the globe (including those in Israel) will continue rising 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 favor reducing exposure to overseas corporate bonds with credit ratings below investment grade, given 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 create 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 reiterate our recommendation that equities make up the main component of investor portfolios.

 

  • We advise that investors increase their exposure to local stocks. Israeli corporate profits are expected to rise, given the outlook for solid growth in the local economy, a strong labor market, and projections that the Bank of Israel is unlikely to raise its policy rate in coming months. As an additional plus, the valuations on Israeli shares are more attractive than their overseas counterparts, and we consequently advise slightly overweighting Israeli shares relative to overseas stocks.  

 

  • 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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