Leumi Capital Market Review
Our main investment recommendations:
- The call for early elections in Britain, as well as questions about the outcome of the first round of elections in France, and a slight rise in geopolitical risk in the Middle East and North Korea, have been the focus of investor attention in recent weeks, and could determine the course of financial markets over the near term.
- 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 time being, 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. However, if they persist, they could set the stage for the gradual transition away from the ultraloose monetary policies of recent years, and interest-rate hikes could engender changes in the way all assets classes are priced over time.
- 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 faster than markets currently expect. This assessment is based on our outlook for aggregate demand and rising inflation overseas. But the pace of rising consumer prices in Israel might be tempered by the strength of the shekel as well as 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 that investors maintain an average level of exposure to equities. While stock valuations are undeniably high, so are the valuations on all other assets classes, leading us to recommend that shares remain the main holding in investor portfolios. We recommend that investors maintain significant exposure to Israeli stocks, given that the earnings of Israeli firms are expected to rise, thanks to 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, given the rich valuations, investors should be selective in choosing stocks, and refrain from investing in general index-linked products, either in Israel or abroad.
- The gap between the Federal Reserve’s benchmark interest rate and that of the Bank of Israel is expected to widen in 2017, and could lead to heightened exchange-rate volatility later this year 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 for 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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