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Weekly Capital Market Review

For the week of:
MAR. 11-18, 2018

Our main investment recommendations: 


  • The global economy keeps improving against a backdrop of slowly rising inflation. The longer this trend continues, the greater the likelihood of it spawning the gradual transition away from the ultraloose monetary policies of recent years. And rising rates, it’s worth noting, could lead to changes over time in the way all assets classes are priced.


  • Israel’s economy also shows signs of ongoing improvement against a backdrop of low inflation and a strong shekel relative to its 2-year average—factors that should enable the Bank of Israel to keep its policy rate at near-zero levels for the time being. But the degree of uncertainty in the local market has risen over the past few weeks, and recent data indicate a modest slowdown in the housing sector relative to the past two years.


  • We expect inflation in Israel to rise at a more subdued pace than in overseas economies, thanks to further measures by the government to bring down the cost of living, slower rises in housing prices (as reflected in the consumer price index), and the strong shekel. But a faster pace of wage growth, as well as solid demand, and the slow rise in inflation in overseas economies, could mitigate the impact of the aforementioned factors.


  • We recommend positioning bond portfolios in short to intermediate durations, given that interest rates are projected to rise across the globe in coming years. We also advise maintaining a slightly longer duration in Israeli fixed-rate sovereign bonds than in equivalent bonds overseas, based on our assessment that the Bank of Israel is likely to leave its policy rate unchanged for an extended period, while monetary policy in some of the world’s leading economies may prove less accommodative in the months ahead.


  • 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 continue recommending that investors maintain an average level of equities in their portfolios, and that shares serve as the primary means of gaining exposure to risk assets. While it’s true that equity valuations are high by historical standards, so are the valuations of all other asset classes.


  • Investors are advised to be selective in their choice of stocks, avoiding general index-linked products, both in Israel and abroad. Moreover, certain sectors (and parts of the world) are likely to benefit more than others from the global economy’s continued growth—particularly industries with a lower sensitivity to rising interest rates.


  • The gap between the Federal Reserve’s benchmark interest rate and that of the Bank of Israel is expected to continue growing in 2018. The widening gap in the two countries’ policy rates should somewhat decrease the underlying pressures for the shekel’s appreciation. We advise that investors gain significant exposure to foreign currencies by investing in overseas stocks and corporate bonds—a recommendation based, in part, on the potential for forex holdings to reduce the overall volatility of investment portfolios. Investors should choose a suitable degree of forex holdings and put currency hedges in place if necessary, in order to avoid overexposing their portfolios to currency risks.


  • It’s critical that investors find the right balance between risk assets, on the one hand (shares, commodities, and corporate bonds), and highly liquid assets and government bonds, on the other. The aim is to create a safety cushion that maintains portfolio risks at reasonable levels.  


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