BlueStar Indexes Blog

March 2017 BlueStar Israel Equity Review & Outlook


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HOW DOES ISRAEL PERFORM IN THE OECD ECONOMIC OUTLOOK?
Israeli Global Equities, as measured by BIGI®, gained 3.5% in January and 6.2% for 2017 as of March 8.  BIGI® outpaced US equities for the second month in a row and outpaced Global Developed and Emerging Market equities as measured by the MSCI EAFE and EM indexes in February. Like January,Israeli pharmaceuticals stocks rallied throughout the first half of the month but only to be hit with another wave of selling toward the end of the month. While Teva posted a positive, above-trend (vis-à-vis BIGI)month, Perrigo posted another month of poor performance and continued to post below-trend performance. We will resume our analysis of Israel’s Health Care sector next month.

Israeli Global Technology Equities, as measuredby the TA-BIGITech® benchmark, gained 2.5% in February after rising by 5% in January. TA-BIGITech was led higher by a mix of small and large companies: Mobileye, Wix.com, Amdocs, Attunity, Elbit Systems, and Tower Semiconductor contributed between 0.15% and 0.69% to February’s performance. On the other hand, TA-BIGITech’s gains were limited due to pull backs in companies such as Orbotech, NICE, CyberArk, and Ceva. Click here for BlueStar’s monthly Technical Analysis update.

 

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WHERE DOES ISRAEL FIT INTO THE  UPDATED FORECAST FOR THE GLOBAL ECONOMY

There was something for everyone in the March 7th OECD Interim Economic Outlook ("the Report"). The report could be used by both stock market bulls and bears as confirmation of their thesis. Global growth and trade are picking up, the capacity of Developed Markets around the world to engage in fiscal stimulus programs is high, and reflation is pulling Emerging Markets like Brazil and Russia out of recession. However, it seems the OECD is uncomfortable with financial markets' reaction to these developments due primarily to the manifestation of moral hazard issues in global fixed income markets over the last nine years and the pervasion of unsustainably low-interest rates into every nook and cranny of the global capital markets.

First and foremost, while the OECD Report noted a pickup in global economic growth, that growth is still projected to be low compared to historical standards. For investors who are looking to increase exposure to countries with faster economic growth, Israel ought to be near the top of the list. The Israeli economy grew at around 4% in 2016, with 6% overall growth in Q4 and 8% growth in exports in Q4 (exports have been a notable weak spot for the Israeli economy over the last few years, but we are now seeing a significant rebound in that vital component of GDP). With Israel, investors get access to an above average growth economy with the added benefit of exposure to a world-class technology sector comprised of many of the companies leading in transformative technologies such as autonomous driving, artificial intelligence, the internet of things, and cyber security.

The OECD put a heavy emphasis on the fact that much of the expected increase in economic growth and equity market gains is based on expected fiscal stimulus packages in many Developed Market economies. Israel's conservative fiscal policy over recent years (public debt to GDP ratio dropped from 75% in 2009 to 65% in 2015 to 62% in 2016) has put the Israeli government in a very strong position to actually implement increases public spending to boost GDP with minimal risk of crowding out private sector investment spending.

Even though Israel is a Developed Market, it is likely to benefit from global re-inflation in ways similar (though to a lesser extent) to Brazil and Russia. Israel is home to one the largest discoveries of energy resources anywhere in the world over the last 15 years. Israel's GDP is being dragged down by energy imports by a smaller degree each year as Israel moves toward energy independence. Also, Israel will begin exporting energy resources over the coming years which may actually turn a former drag on GDP into an accelerant of GDP.

Labor markets in most Developed Markets are tightening up which is expected to result is lower unemployment rates and upward pressure on wages as global economic growth expands. Israel's labor market has been at record low unemployment rates, record high participation rates and record low job vacancy rates for well over a year. So unlike many European Developed markets, Israel's economy is expected to accelerate from a very strong position rather can merely dig itself out from a very weak position.

Finally, Israel is included among those countries that have experienced an exceptional period of growth in real estate and housing prices in the last ten or so years. If there are not significant increases in real wages in Israel and/or if Israel's demographic trends worsen for some reason, a correction in real estate prices could become a major problem for the Israeli economy.

Throughout the second half of 2016, the Bank of Israel signaled that it would likely raise its key policy interest rate from a record low of 0.10% to around 0.25% in Q4 2017. In its March interest rate decision, the Bank of Israel used softer language: "... the Bank of Israel will increase the interest rate to 0.25% within about one year". So, like European Developed Markets and Japan, the short-term interest rate differential between Israel and the US has widened substantially. But unlike Israel's developed market peers, the Shekel has been relatively stable-to-strengthening over the last few months. We are a bit confused and confounded by this development as one would expect the Shekel to weaken significantly, adding an additional tailwind to Israel's exporters. We view the strength in the Shekel as a result of Israel's relatively strong economy, strong fiscal position, and an emergence of Israel's energy industry. At the same time, we believe that the Shekel cannot defy the laws of global economics for too long a period of time and believe that the Shekel will have to weaken at some point in the near future.

 
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