Meitav's NIS 100,000 Investment Portfolio

"Globes" continues with its weekly feature outlining the investment portfolio recommended by various investment managers operating in the capital market.

This weekly recommendation is intended for private investors, rather than companies or organisations, seeking an investment for the short-term (a few months), the medium term (about a year) or the long term (upward of three years).

Our experts, all of them seasoned capital market investment managers, have been asked to construct a recommended investment portfolio for each of those three terms, giving detailed reasons. We have imposed no restrictions, recommendations need not even be limited to the capital market, and experts are entirely free to structure the portfolios as they deem best.

"What would you do With NIS 100,000?" is this column's leading question. Today's recommendations come from Meitav, a highly-experienced, long-standing Israeli brokerage firm.

Meitav's general manager Zvi Stepak, explains that investment decisions should always be based on two main considerations: macro-economic assessments as regards the state of the economy, and assessments as to the relative price levels of the various investment channels.

Accordingly, Meitav's recommended investment portfolio derives primarily from a non-too-favourable macro- economic assessment. The company expects a considerable economic slow-down over the next two years, possibly even sliding, in the most extreme case, into an actual recession.

The company accordingly looks for a real shekel devaluation over the next twelve months, which in the worst case scenario could deteriorate into a dollar rush and uncontrolled devaluation.

"The dollar today is the cheapest commodity in the market", writes Stepak in his prognosis. He notes that a devaluation combined with an interest-rate reduction could favourably affect the Tel-Aviv Stock Exchange even if the economy slides into recession and increasing unemployment.

As to the second consideration, namely that of the various investment channel prices, Meitav consider today's market prices to be very convenient for constructing an attractive medium- and long-term (possibly also short-term) investment portfolio.

They point to the unprecedented yields now prevailing in bonds (government index-linked bonds are very close to their peak of the past decade), in both the linked and the unlinked channels. Almost mathematically, they maintain, yields in this market can be expected to decrease, and investors can reap the profits.

In Meitav's opinion, the share market too, although not as mathematically predictable as the bonds market, is also trading at a fairly low level. They assess the Israeli share market to be 30% under-priced in Maof index shares, and 50% in certain Karam shares. "It is difficult to determine when this potential will be realised, but what is clear is that the longer the investment term, the higher the likelihood of the potential being realised".

Meitav's recommended investment portfolio is adapted to the needs of the investor prepared to put up to 50% of his money into shares. This would be, not a solid investor, but not a speculator either, one of average tastes where shares are concerned. Meitav recommend the following portfolio structure:

Index-linked:
Meitav stay well away from short- term index-linked securities, maturing within a five-year period. Their recommendations focus on debentures of precise 5-year and 10-year terms. They follow the customary practise of increasing their rate of investment in long-term debentures to conform to the investment range of the portfolio.

Stepak concurs with the recommendations published by this column in recent weeks. The present-day level of yield on debentures, says Stepak "is more than reasonable", and can be expected to drop in the long term, yielding profits for bond investors. In the shorter term, on the other hand, there is still a risk of rising yields, and accordingly, long-term debentures are definitely not recommended for that range.

Specifically, Stepak recommends Kfir index-linked debentures with a variable interest rate), since they are being traded at below their economic value (adjusted value), and because they may be expected to provide an anchor of greater stability for the investment portfolio.

Dollar-linked:
Stepak strongly emphasises dollar investments as well worthwhile, made via the acquisition of dollar-linked securities (Gilboa-type debentures).

For the short and medium term, in effect, Stepak goes for equal proportions of dollar-linked and index-linked in his recommended portfolio, because he assesses that within those time ranges, the dollar will post a real revaluation, and also because returns on dollar-linked are 1% higher than returns on index-linked.

For the long term, on the other hand, he once more assigns preference to index-linked, unless the dollar significantly gains strength world-wide.

Shares:
It is generally accepted (another recommendation agreed by all our experts so far) that the recommended percentage of shares to be held in the portfolio rises in proportion to the length of investment range of the portfolio. Meitav's recommended shares are:

1. Ellern-Migdal Investments Corporation: A share that represents a sort of closed mutual fund, being traded at (a discount of) about 50% below its asset value. Ellern's regular discount is 20%-35%, and therefore, in case of a market boom, Ellern is bound to rise 60% more than the general rise of the share market. In fact, it could rise even higher, because part of Ellern's assets too are traded on the market at a deep discount of their own.

2. Clal Electronics This company too is traded at a deep discount, well below its asset value. Meitav note the company's major, successful investment in ECI, and a series of other investments, that can potentially ripen into a future issuance, and the fact that it invests primarily in export firms, providing another lever for benefiting from the anticipated shekel devaluation. One weakness of Clal Electronics, noted by Meitav, is its investment in Scitex.

3. Export companies: On the whole, Meitav recommends this sector. Its specific recommendations target Agan-Makhteshim (this forms part of a sweeping consensus: these are the only two shares recommended by all our experts to date), Tadiran, Tadiran Telecommunications and Elron.

4. Tourism sector: The political crisis has been a severe blow to Israel's tourism industry, sending hotel-keeping and tourism shares into a tail-spin. Meitav say this would be a highly risky investment at present, but worthwhile in the medium and long terms, both because of the expected devaluation and because of the low levels to which share prices have dropped.

5. Supersol: Of those local companies for which there is a standing recommendation even when the economy slows down, Meitav points to Supersol. It is traded at below par, operates in food, a slow-down proof sector, and can be expected to benefit from the shift toward chain-store shopping.

6. Electra: A leading company in its field, with a range of activities and relatively great flexibility.

7. Meitav further mentions a series of sectors which, although they will be adversely affected by the slow- down, are still a worthwhile investment, due to their attractive price on the TASE. They include the insurance sector (Clal Insurance), the mortgage industry (Mishkan Bank), the commercial banks (Merkaz Hashilton Hamekomi Israel*, Bank Hapoalim, for upward of the medium term only), real estate (Property and Building, a third consensus share of all experts to date), Africa-Israel and Israel Land Development Corporation.

* A bank granting services to municipalities and regional councils.

The expert quoted above works in the investment industry and may hold positions in securities mentioned in the column. This column should not be taken as advice to buy, sell or continue to hold any securities, and anyone acting on the advice of this column does so at his or her own risk.

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