With the Tel Aviv Stock Exchange (TASE) at record high levels, and natural gas discoveries offshore from Israel capturing investor interest around the world, Barclays Capital today published a bullish outlook for Israel's economy in 2011.
Barclays analysts say, "Tel Aviv's main indices kick off 2011 at or near all-time highs, with a strong economic backdrop continuing to provide support…The banking sector is well capitalized, the emerging energy sector remains squarely in focus and the local technology sector is capitalizing on the fastest-growing trends in tech. While the markets are high, we still see opportunity." They add that the move to MSCI classification of Israel as a developed market from emerging market "was smoother than we expected and opens up Israel to a broader range of potential new investors and flows of capital."
Barclays analysts claim that 2011 is a year of transition for Israel's economy, from one based only on human resources (as seen in the development of the high tech industry) to one based on natural resources, chief among them the natural gas discovered offshore from Israel, and Dead Sea resources.
"Israel's economic performance is improving. Growth has broadened and strengthened; the economy seems to be well on the way to full recovery." Yet the analysts warn that "inflation is rising and presents a possible macroeconomic risk." They add that Israel will transform from a high debt to a low debt country in the next decade.
The Barclays analysts say that they have little to add to the political discussion that has not already been said, but that in their opinion, while the political situation appears stuck to them, "given the relative stability it should not be a headwind for the economy or markets in 2011."
Barclays forecasts the shekel-dollar exchange rate to end 2011 at around NIS 3.50/$. The interest rate is expected to rise to 3% by the end of the year.
A major risk to Israel's economic growth, say the analysts, remains its dependence on exports. "Any economic weakness in the US, Europe or Asia will certainly be felt in Israel given the high level, over 40%, of exports as a percentage of GDP. The economy will need to balance the threat of inflation, currency appreciation and low global rates to stay on track."
Looking at the developing energy sector in Israel, Barclays says that a risk it poses to the economy is that it will lead to a strong appreciation of the shekel, hurting domestic industries. "In our view, the accumulation of foreign reserves by the Bank of Israel has been an appropriate response to the existing current account surpluses. However, when energy production kicks up, the efforts of the Bank of Israel will need to be supplemented. The government will need to use its tax-royalties windfall from energy production in ways that prevent excessive currency appreciation. We expect that it will establish a sovereign wealth fund to channel some of the foreign exchange earnings out of local markets. In addition, the government could use some of the funds to finance major infrastructure improvements that would further improve private sector productivity."
The investment bank has two Israeli companies among its global top stock picks for 2011 - Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) and Israel Chemicals Ltd. (TASE: ICL). The analysts set a target price of $73 for Teva, about 44% above its current price, as they believe investor fears for Teva are overblown.
Barclays prefers Ratio Oil Exploration (1992) LP (TASE:RATI.L) in the energy sector, with a target price of NIS 0.80 representing 43% upside potential. The investment bank picks Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR) in the telecommunications sector, and Bank Hapoalim (TASE: POLI) is its top Israeli bank share. They expect a rise of 18% in Hapoalim's share price, even as other Israeli banks are also given optimistic outlooks.
Two technology stocks favored by Barclays are NICE Systems Ltd. (Nasdaq: NICE; TASE: NICE) and EZchip Semiconductor Ltd. (Nasdaq: EZCH; TASE:EZCH).
The analysts are also impressed with the government's fiscal policy, saying "Fiscal prospects are excellent as revenues have been rising rapidly on higher economic growth. The Israeli government is actively lowering its deficits and debt. It is keeping expenditures under control and the buoyant economy is contributing to revenue collection." They say that while the official upper limit on the deficit for 2010 is 5.5%, it appears that the 2010 deficit will be 3.5-4% of GDP as revenues have been better than anticipated. In addition, says Barclays, according to the recent IMF report, the government is planning to reduce the deficit to 3% in 2011 and 2% in 2012. "In the next few years the government plans to lower the deficit to 1% of GDP per annum. This will help bring overall government debt levels towards the 60% of GDP target sooner. The government is putting a priority on bringing down the level of government debt, which is quite high. If outperformance on revenue continues, tax cuts could be expected."
Published by Globes [online], Israel business news - www.globes-online.com - on January 10, 2011
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