Investors in global capital markets are pleased with the positive opening to 2013: so far this year, the leading indices have risen 6-10%. The question is whether the rally will continue, or if a correction is in the works. BlackRock executives, who met local investment institutions during a visit to Israel last week, believe that the rally will continue. BlackRock Inc. (NYSE: BLK) has $3.79 trillion in assets under management.
"There's a lot of money waiting on the lines. A lot of investors are underweighting shares, but the underlying economics look quite good," says BlackRock head of Middle East and Africa business Nick Anderson. His colleague, iShares EMEA Investment Strategy head Stephen Cohen adds, "I think from a fundamental standpoint, definitely the last 3-6 months, things improved. In the US, the economic data is definitely better, also in China, and in Europe there are signs that data is improving particularly in Germany, and expectations are very low.
"Another thing is that the perception of risks is lower - if you go back to the middle of last year, you had a lot of focus on the euro, whether it could survive. The euro has a huge number of challenges over the long term, but in the short term the ECB has done a lot to remove the immediate risks and it supports the market.
"And then you have a situation where people underweight equities; we've seen a big re-allocation to equities in the last four weeks, but there's still cash on the sidelines. So I think as long as the data remains fairly positive, then people will still look to equity allocation."
Cohen warns, however, that there are still risks, including the upcoming elections in Italy.
Europe is still a cheap market
"Globes": Where do you see investment opportunities?
Cohen: "In general, we see opportunities in emerging markets equities, particularly in Latin America and Asia. We think with China's growth stabilizing that the emerging markets will do better this year. Emerging markets have not been strong over the last 12 months relative to developed markets, and we think there are opportunities. Over the last month we've already seen investors starting to reallocate to emerging markets, both in equities and debt.
"Europe remains a very cheap market on a valuation basis. We see some allocation to the peripheral markets - to Italy and Spain. A lot more depends on the next month, we will be cautious, we have the Italian elections coming and there's a lot of news flow over Italy and Spain. Assuming there is no significant negative event, they still offer valuation.
"In Latin America, Brazil looks attractive. We like China on valuation basis, there has been a recovery and we think there is more potential. And we still think Japan has potential to rally with the yen weaker. We'll have a new Bank of Japan governor in the next couple of months and that could be the next catalyst."
There will be a similar change in Israel. How will the resignation of Governor of the Bank of Israel Prof. Stanley Fischer affect investment in Israel?
"I'm not an expert on Israel, but I think clearly it was a bit of a surprise to the market. Coupled with the formation of the coalition and the budget I'm sure there's a little bit of uncertainty. When a central bank governor is changed, when you find that there's a good set of candidates it could be a smooth transition. That's not to say the fundamental risk of Israel is any different."
Is Israel an investment opportunity?
"When you look relative to Europe, the GDP growth in Israel is superior to what you find in most European countries. For people looking for growth there's an opportunity here. Another thing that people are looking for in Israel is the technology industry which is clearly one of the drivers of the economy. As with a lot of countries, it depends a lot of on what happens globally. But if global growth can pick up a little bit that will help the export sector. The domestic standpoint is more dependent on what will happen with the budget."
In your opinion, are Israeli investors biased towards the US?
BlackRock iShares Israel director Alex Pollack: "I think they definitely are. Over the last years there's been this preference to go on to US equities and to invest in US sectors. But I do think that's changing. People are looking beyond the US."
What do Israeli investors want when they invest through you?
"Israeli investors are looking to increase their foreign allocations. What they're looking for, it's really a mix of US equities, emerging markets equities, an increased interest in fixed income products as well. They are very open in the way that they look at the world outside of Israel, and the way they look for investment ideas."
In recent years, there has been a jump in the foreign exposure of Israeli institutions.
"My personal view is that there are a couple of reasons why you see this happening. First of all, the regulators in Israel have been encouraging institutional investors to diversify their business outside of Israel. Secondly, Israel is a small country and it has very large institutions here. As they get bigger (insurance side and pension side where they have new money coming every month) they are almost forced to go offshore because they're already very heavily invested in the Israeli market."
Anderson: "I think it is positive for the Israeli investors. It enables them to diversify their risks and we have massive opportunities now. I also get the impression that Israelis are very global, they travel a lot and I think it's natural for them to invest in areas they know as well."
BlackRock allows passive investment, through iShares. Pollack says that Israeli clients want to combine passive and active strategies. Cohen sees strong growth potential for ETF markets in Europe, as people mix active and passive investment strategies.
Pollack already knows how to characterize the typical Israeli investor. "He is more passive than active. The reason for that is that Israel has one of the largest ETF industries in the world; the 'Teudot Sal' industry is the third largest after the US and the UK. The 'Teudot Sal' has been a long time in Israel, a long time before Israeli institutions started investing outside. Institutions have been comfortable with the idea of indexing, so when they started looking outside of Israel it was a natural transition to use the indexing tools, ETFs."
Published by Globes [online], Israel business news - www.globes-online.com - on February 11, 2013
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