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Leumi Capital Market Review

Review for the week of:
March 16-23, 2017

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, for the meantime, at near-zero levels, and could continue providing short-term support to local financial markets.

 

  • Data on the global economy point to ongoing improvement, while inflation in the world’s largest economies is clearly on the rise. The positive trends in financial markets could well continue for the foreseeable future. But if they persist, those trends could set the stage for the gradual transition away from the ultraloose monetary policies of recent years. Add to which, interest-rate increases could engender changes in the way all assets classes are priced over time. We recommend that investors refrain from increasing the level of risk in their portfolios, given that valuations on stocks and corporate bonds, in Israel and overseas, 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 and rising inflation overseas. But the pace Israel’s rising consumer prices could well be tempered by the shekel’s strength and potential tax cuts.

 

  • We advise 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. However, the risks posed by shares continue to rise as major stock indices across the globe keep advancing strongly. Owing to the elevated valuations in all other asset classes, we’re recommending that equities, for now, remain the main component of investor portfolios and that investors gain significant exposure to Israeli shares, given that the earnings of Israeli firms are expected to rise, thanks to the outlook for the economy’s faster pace of growth, its healthier composition, the 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 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, without 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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