UBS analysts Darren Shaw and Roni Biron see Israel's economy recovering, though not bouncing back strongly, from a recession. At the same time, they do not expect the Tel Aviv Stock Exchange (TASE) (measured by the Tel Aviv 25 Index) to outperform European or EMEA shares over the next 12 months.
The analysts note that the TASE is up 25% year-to-date in dollar terms - which is in line with emerging market exchanges, but outperforms Europe (up 7%). Over the next year, the TASE is not expected to outperform Europe or EMEA shares, due to pressure on Israeli shares from selling by funds tracking the MSCI emerging markets indices.
Shaw and Biron find that the TASE will follow the direction of global equity markets for the remainder of this year, and the first half of 2010. Given that economic conditions are still challenging, and that they expect slower growth ahead, the analysts expect equity gains to slow.
Israel was recently classified as a developed market by MSCI, so it will be added to global benchmark indices such as MSCI EAFE and MSCI World, and removed from the MSCI EMF index. While Israel was a defensive market compared with emerging markets such as Russia and Turkey, it will likely be viewed as a riskier country within developed markets.
The reclassification will take affect in May, 2010. The UBS analysts see emerging market index investors selling before what they call potentially huge inflows from developed market index investors. The near term selling adds to the pressure over the next twelve months.
UBS sees three companies attracting much interest from developed market index investors, though one may not make those indices at all. Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) accounts for about 61% of MSCI Israel, and will attract the majority of new investment. Israel Chemicals Ltd. (TASE: ICL) accounts for about 7% of MSCI Israel. Check Point Software Technologies Ltd. (Nasdaq: CHKP) accounts for about 6%of MSCI Israel. However, it only trades on Nasdaq, and MSCI said it will only include TASE-listed shares in the MSCI EAFE and MSCI World indices. Unless Check Point dual lists, it will not be in those indices.
Unrelated to the MSCI reclassification, UBS remains cautious on Israeli banks, though it is a bit less concerned than it had been earlier in the year. While Tier 1 capital is low and profitability is low (average return on equity below 10%), there has been a lack of bankruptcies in Israel, and a sharp economic recovery until now bodes well for the banks.
UBS gives Mizrahi Tefahot Bank (TASE:MZTF) a "Buy" recommendation, and Israel Discount Bank (TASE: DSCT) "Neutral", and raised price targets on all the major banks.
UBS also recommends Israeli telecoms, calling the sector highly defensive against the economic slowdown.
UBS's top three picks among Israeli shares are Teva (a lot of M&A noise; Teva has a great track record with deals, so we like to see them being aggressive with M&A; We wouldn't be surprised if they do a deal before the end of the year), Cellcom Israel Ltd. (NYSE:CEL), and Bezeq The Israeli Telecommunication Co. Ltd. (TASE: BEZQ).
UBS analysts forecast a "subdued" pick-up after the recession. Their forecast is for -0.8% GDP growth in 2009 (the Bank of Israel forecasts -1.5%), and they forecast 2.7% growth in 2010, which would still be one of the strongest recoveries in the EMEA region.
The analysts explain, "Growth prospects would be a lot weaker if it were not for the government’s big fiscal stimulus. Thanks to fiscal reforms enacted in recent years, the government now has room for a substantial expansion in public spending. As a result, the budget deficit is likely to rise from 2.1% of GDP in 2008 to perhaps 6% of GDP in 2009. The 2010 deficit is likely to be only little smaller. The public sector debt stock, which had declined for years to around 78% of GDP in 2008, is likely to jump well above 80% of GDP again this year, and stay above this mark for the next few years."
The shekel-dollar rate is forecast by Shaw and Biron to reach NIS 3.95/$ at the end of 2009, and to be NIS 3.80/$ by the end of 2010.
Published by Globes [online], Israel business news - www.globes-online.com - on July 6, 2009
© Copyright of Globes Publisher Itonut (1983) Ltd. 2009