"Globes" continues with its weekly feature outlining the investment portfolio recommended by various investment managers operating in the capital market. This weekly recommendation, we would remind our readers, 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.
Epsilon's recommendation
|
|
Short
term |
Medium
term |
Long
term |
|---|
| Solid Investor |
Short
term
debentures -
50% |
Short
term
debentures -
20% |
|
Medium
term
Shachars -
50% |
Medium
term
Shachars -
70% |
Long
term
Shachars -
85% |
Shares
0% |
Shares
10% |
Shares
15% |
|
| Average Investor |
Long
term
Shachars -
75% |
Long
term
Shachars -
60% |
Long
term
Shachars -
50% |
Shares -
25% |
Long
term
debentures -
10% |
Long
term
debentures -
10% |
|
Shares -
30% |
Shares -
40% |
|
| Bold Investor |
Long
term
Shachars -
50% |
Long
term
Shachars -
35% |
|
Long
term
debentures -
10% |
Long
term
debentures -
15% |
Long
term
debentures -
30% |
Shares -
40% |
Shares -
50% |
Shares -
70% |
"What would you do with NIS 100,000?" is this column's leading question. Recommendations, however, are obviously valid for any investment amount, from NIS 10,000 to NIS 1,000,000. Today's recommendations come from Epsilon, one of Israel’s biggest non-TASE brokerage firms.
"We are against convertible debentures and investment in foreign currency, and for shekels, long-term linked instruments and shares. Most especially, we are for the underdogs of the share market, except that it is very difficult to identify them". This is how Epsilon present their recommended investment portfolio. In the same breath they add the disclaimer: "The best thing is to work via professionals and not build a portfolio on one’s own, especially when investing in shares".
Epsilon’s recommendations rest, as stated, on certain basic principles. Thus, they seek to promote shekel instruments, especially for private investors (who pay tax on the interest, and have an eye on the net yield), long-term index-linked debentures, and shares.
As regards shares, Epsilon’s experts explain that the real bargains on the share market are to be found in shares that are not so widely talked of. They refer specifically to the market underdogs, namely shares or sectors decried by prevailing opinion. In Epsilon’s opinion, negative market assessments are frequently exaggerated, so that if these shares post even the slightest pleasant surprise, there will be very fat profits to be had. In terms of 1996, they mention the shares of Israel Chemicals, some textile shares and real estate shares as shares that the market failed to appreciate, and investment in which ultimately proved very well worthwhile.
The problem is, of course, that the underdog is very hard to spot, if only because "underdog" shares scarcely rate a mention in analysts’ recommendations; and even if one does spot them, they look very risky. After all, what if the market is right, and that sector or share really does prove a disappointment? Accordingly, Epsilon are not eager to recommend "underdog" shares. They reluctantly mutter something about shares such as Maritime Bank, Elbit, Paz Chen or Magvot Arad, the negative market sentiment regarding which may be unwarranted or exaggerated. At the same time, the experts reiterate their warning as to the level of risk involved in such investment, which should not be essayed except with professional help in portfolio management, or through an appropriate mutual fund.
Thus, as far as shares are concerned, Epsilon confine their recommendations to within the safe bounds of "shares that are widely talked of". Where, that is to say, the company also demonstrates economic viability. "The middle of the market (and all the shares we recommend come from the middle of the market), is still cheap, so there is no reason to go investing in the margins, unless one does so via mutual funds. True, the margins are more interesting, but the middle of the market is still sufficiently interesting for us to remain there".
Epsilon’s share portfolio is based on a number of relatively optimistic economic premises. They expect the Bank of Israel to continue reducing the nominal interest rate. This will result in a lowering of the real interest rate, an annual inflation rate of 8% to 9.5%, continued real erosion of the currency basket exchange rate (the basket remaining close to the lower limit of the fluctuation band), price erosion in the real estate market and the growth of the product by 3.5% to 4%. Epsilon qualifies all the foregoing by a mention of the risk elements that are influencing the market: misgivings as to a Wall Street crash, political instability in Israel and a possible deterioration of the political situation.
Shekel instruments
On the basis of the foregoing assumptions, Epsilon infer that shekel debentures are still preferable, for investment purposes, to index-linked debentures, especially for the private investor with an eye on net yield.
Index-linked instruments
Epsilon do, however, recommend diversifying the portfolio with index-linked debentures that have a lengthy redemption term. This is because they expect the interest rate to continue on its downward path, yielding capital gains on these debentures. On the other hand, they do not recommend investing in the recently popular convertible debentures. In their opinion, the convertible debentures mode has already played itself out.
Foreign currency linked instruments
These are not recommended by Epsilon. They assess that the present-day risk in foreign currency investment outweighs any prospect of gain. "If there is a devaluation, we do not believe it will derive from foreign currency market pressures, but from the lowering of the interest rate in the economy. In that case, it is preferable to benefit from the lowering of the interest rate in shekel instruments or shares, than be hung out to dry for a year on the foreign currency market, in expectation of a devaluation that may never arrive".
Shares
This is the instrument most warmly recommended by Epsilon. They point to price levels, which are still attractive, and to the expected lowering of the interest rate, and assess that the share market’s positive trend will continue. Epsilon particularly recommend investing in the following sectors:
- The plastics and chemicals industry: This industry is primarily export-oriented, and will therefore not be affected by the economic slow-down. The industry is growing, and the outlook is that it will continue to grow due to world-wide price hikes. Specific recommendations include Petrochemical Industries, the Agan-Makhteshim group, L.M. Lipski, American Israeli Paper Mills and Teva.
- Income producing real estate:
Epsilon recommend investing in well-established, sound companies, that are in a position to snap up convenient bargains for expansion in time of crisis. Most properties in this industry are leased out under long-term leases, at rents assuring a good yield. Also, a concealed profit is to be found in some companies, due to the difference between market value of the land and building and the historic value at which they appear in the company’s balance sheet. Particularly recommended in this field are the shares of Industrial Buildings, the Jerusalem Economic Corporation, Darban Investments (all three belonging to the Eliezer Fishman group), and Bayside Land Corporation.
- Banking and insurance:
The shares of the major banks are trading at a market value similar to shareholders’ equity, and at a price only 8 to 10 times higher than their anticipated future profitability (p/e ratio). This price is low compared to that of banks world-wide, and constitutes a basis for solid, long-term investment. The insurance companies, especially those that carry big life assurance portfolios, are trading at below par. Any future improvement in the capital market and in the level of yield of debentures may significantly improve their financial results. Specifically recommended are the shares of Bank Leumi, Bank Hapoalim, the First International Bank, Leumi Insurance, Clal Insurance and the Phoenix Insurance company.
- Marketing chain-stores:
The market share of Israel’s marketing chain-stores is expected to increase as the standard of living rises. The mounting concentration of the sector will also operate to strengthen the big chain-stores. Specifically recommended are Super-Sol, Blue Square and Darban Investments.
Previous Recommendations:
The above recommendations were made by a person/s working in the investment industry, who 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