And the expected long-term decrease of inflation and interest rates.
In addition, it should be borne in mind that continuous trading is due to begin next week. While starting only in ten shares for the time being, eventually it should extend to all Tel-Aviv Stock Exchange shares. If successful, the switch to continuous trading will boost market activity and trading volumes.
On the other hand, data on the continued economic slowdown in Israel along with the high prevailing level of competition, will find expression in companies’ financial statements as of the end of the second quarter. The reports are expected to indicate a drop in sales and the continued erosion of operating profit margins. Another fact that should be borne in mind is that the market has come a long way recently, rising 45.1% since the beginning of year and 1.8% since the beginning of the month (in the Mishtanim index) and also that mounting political-security tension could exert a negative influence.
To sum up, we expect the positive market influence to continue, although negative influences could result in short-term profit taking. This could prove a buying opportunity.
Bond Market
Index-linked -- Lively demand and rising quotations were recorded this week in this instrument. Redemption yields on these debentures are presently around 3.6% gross in the short term and 3.8% in the long term. The positive trend was affected by misgivings as regards high forthcoming indices, the shortage of merchandise and the public’s lower provident fund withdrawals.
Assuming an annual inflation rate of 8.2% a year in advance, the market, as seen by the gross return investor, is at a point where linked and non-linked instruments yield a similar return. In this instrument, accordingly, we recommend short to medium-term linked debentures with a maturity yield of 3.6%-3.7%, having regard also to the fact that the next index is expected to be relatively high.
Lower returns in the index-linked instrument, on the other hand, will cause the next (variable) interest rate determined in respect of Kfir bonds to be some 0.5% lower. We expect that, as a result, and along with recent rising quotations, Kfir-type bonds will become less attractive. Accordingly, we recommend reducing debenture holdings of this type, in favour of short-to-medium term index-linked debentures.
Foreign currency-linked -- This instrument was stable this week, thanks to the stability of the dollar exchange rate. At gross redemption yield levels of 6.5% (libor + 0.6%) in the long-term Gilboa series, investment in this instrument appears reasonable for investors measuring in dollar terms and for those wishing to avoid currency risk exposure. In our assessment, the currency basket is more likely to return to the lower limit of the slant fluctuation band than to climb back up in the direction of the record levels of a few weeks ago.
Shekel Instruments -- This instrument was characterised in the past week by a negative trend, with rising yields, on expectation that the Bank of Israel may raise the key lending rate this month.