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Leumi Capital Market Review

May 18, 2017

Our main investment recommendations: 


  • Political developments in the US and Brazil, coupled with mixed economic news, sparked a sharp rise in market volatility this week, as evidenced by heightened demand for safe-haven assets, selloffs in major stock markets, and widening corporate bond spreads. From a broader perspective, however, recent data point to a clear, gradual improvement in the global economy. The implication is that the main risk to global economic growth, at present, stems from political factors.  


  • In Israel, data indicate that the pace of economic expansion in Q1 2017 slowed somewhat, but only due to transitory factors. The pace of growth is likely to pick up in coming quarters. The current inflationary environment and the shekel’s exchange rate should enable the Bank of Israel to keep its benchmark interest rate at near-zero levels. Taken together, these various factors could provide further support to local financial markets as the year unfolds. However, one of the factors putting the local economy at risk, is the potential cooling off of construction in the residential real-estate market.


  • 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 could well be tempered by the strength of the shekel and 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 of all other assets classes, which leads us to recommend that shares remain the core holding in investment portfolios. We advise maintaining 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 expectations 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 those on their overseas counterparts. But given the rich valuations, investors should be selective in choosing stocks, and avoid 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 also 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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