Stock Market
The following are likely to affect the market negatively:
- The highly probability that the interest rate will continue to be raised in the coming months.
- Although international market nervousness has somewhat abated recently, this does not mean the global capital market crisis is over or has passed.
- A crisis is liable to evolve over the second pullback agreement, due to differences of opinion as to which political entity is to annual the Palestinian charter.
- Companies have recently begun publishing third quarter statements, and we consider it likely that their bottom line will prove adversely affected.
- The sharp (11.25%) devaluation of the shekel against the dollar since the beginning of October will adversely affect the financing expenses of companies that leveraged themselves with foreign currency linked credit. On the other hand, the expected improvement in the revenues of export companies, following the devaluation, will offset the decrease in demand by overseas markets.
- An average 4% decrease in the profitability of US companies (87% of which have so far published their results), in the third quarter of 1998.
The following may affect the market positively:
- International rating company Standard & Poors has announced that it is leaving Israel's economic rating in place. It should be borne in mind that this decision was taken prior to the recent bout of shekel depreciation.
- The relatively low price levels reached by a not inconsiderable number of shares, even by international comparison, may be a good opportunity for entering the market selectively.
Further structural reform, such as the Koor-Tadiran, Delek and other tender offers, indicating, inter alia, a tendency on the part of companies to delist their shares.
- Continuing activity on the part of parties at interest in various companies, as market buyers.
In our assessment, the stock market will continue jittery and volatile, and will be affected principally by localised events, exerting a short-term effect, such as the publication of financial statements, developments in specific companies and also by world market trends. Given the profound uncertainty presently affecting most financial markets in Israel (especially in view of the behaviour of the exchange rate) and elsewhere, we recommend continuing in standby mode and not increasing the share component of the investment portfolio at present. At the same time, we again draw readers' attention to the fact that a not inconsiderable number of shares are trading at prices that are low by any criterion, mainly representing a long-term buy opportunity.
In our assessment, investors who are nonetheless interested to gain stock market exposure, may be well advised to take advantage of the relatively low standard deviations in Maof options as a means of entering the stock market (by purchasing Call options).
The Bond Market
Index-linked:
The future behaviour of the dollar is an unknown,
and based on the fact that forthcoming indices are expected to be high (3.0% in October and 0.8% in November, according to the bank's economic department), and since short term linked instruments rose sharply in the past week, we propose focusing, as regards this instrument, on short and medium term debentures. Kfir-type variable interest debentures should be picked selectively, especially those that pay interest in February-March 1999, due to the sharp downturn on redemption yield rates, the expected increase in issuance supply, and the possibility that interest rates may continue to be raised.
At the weekend, gross redemption yield on index-linked bonds was 3.8% in the short term, 4.6% in the medium term, and 4.9% in the long term; while the one-year Kfir posted a yield of 3.83%, with an incremental yield of -0.31%.
Foreign currency-Linked
In view of the profound uncertainty prevailing in this instrument, despite the relatively high level reached by the dollar exchange rate and the substantial increase in the supply of Gilboas on the primary market, we still recommend keeping a foreign currency component as a part of the conservative portfolio. We would again point out that investments in this instrument can also be made by means of shekel investment in combination with a dollar option, through foreign currency deposits or through foreign currency mutual funds. Also, one might consider going into the dollar-linked market via forthcoming Gilboa issues.
At the weekend, Gilboa-type dollar linked debentures were trading at a redemption yield of 5.7%, at a known dollar exchange rate of NIS 4.309 (Libor plus 0.5%).
Shekel Instruments
Considering that the future behaviour of the exchange rate is uncertain, as is its effect on inflation in the near future, and that there are rising expectations of a further interest rate hike, we recommend applying the shekel portion of the portfolio to short term deposits and short-term negotiable shekel investments. If shekel yields rise substantially, one may consider extending the range of investments in the portfolio.
At the weekend, return on one-year short-term loans stood at 13.1%, five-year Shachar redemption yield currently stands at 13, and seven-year Gilon redemption yield is now 13.7%.
Published by Israel's Business Arena November 8, 1998