What Would You Do With NIS 100,000? Discount Bank’s Investment Portfolio

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

Under present circumstances, where securities consultation is no longer provided and Tel-Aviv Stock Exchange prices are low and considered attractive for investment purposes, "Globes" is endeavouring to fill the vacuum by presenting its readers with a service of basic

This weekly recommendation, we would remind our readers, is intended for private investors, rather than companies or organisations.

Our experts, all of them seasoned capital market investment managers, have been asked to construct a recommended investment portfolio, 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. Recommendations, however, are obviously valid for any investment amount, from NIS 10,000 to NIS 1,000,000. Today's recommendations come from "Tachlit", the portfolio management company of Discount Bank, its general manager Reuven Shiloh and analyst Hezi Cohen.

Tachlit bases its recommendations on a number of economic assumptions as regards 1997: inflation will be at a rate of 9% to 10%, the dollar will retain its real value, (the currency basket being devalued by 9%), the interest rate will be reduced in both nominal and real terms, unemployment will be up 7%, the balance of payments deficit will be reduced, and, most important premise of all, there will be no material untoward political/military developments. Tachlit also assess that the budget cut will in fact be implemented and that the interest rate will thereupon be reduced, the shekel devalued and the "shekel mountain", the general public’s major investments in shekel deposits, will start shifting towards new channels: foreign currency, debentures and shares.

Index-linked investments

A moderate volume (20% to 35%) investment in index linked channels is recommended to all investors, for whatever term. Tachlit do in fact admit that the real interest rates inhering in shekel channels are higher today than net real interest rates in index-linked channels (4.5% to 5.5% in shekel channels compared to 3% to 3.3% in index linked channels). They assess, however, that the expected lowering of the interest rate and the shift of the "Shekel mountain", will create sufficient capital profits for those investing in debentures to warrant their doing so. For this reason, their recommendation focuses on investment in medium term (5-8 years) debentures. This is because, in their opinion, the capital gains that can be expected to accrue there are higher. They also recommend convertible debentures of stable companies, which is to say, companies that are financially strong and solvent, with a net yield of 5% and more. For the longer term, also bearing in mind the need to hedge against inflation, it is preferable to invest in index-linked channels.

Shekel Investments

Tachlit recommends investing in this channel in a medium to high volume in the short and medium term, and in a smaller volume for the long term. The recommendation derives from the high real yield in these channels. In order both to enjoy capital gains resulting from the lowering of the interest rate and to fix a medium-term yield, Tachlit recommends investing primarily in Shachar-type debentures for a three-year term (the longest Shachar). In the long term, the risk of inflation indicates that investment in these channels should be reduced.

Foreign Currency Investments

These are recommended primarily for the short term. Tachlit expects a rapid devaluation of the shekel against the dollar in the near future, due to the budget cut and the interest rate reduction. As soon as the devaluation takes place, Tachlit recommends taking profits and pulling out of this channel. Specifically, they recommend investing in foreign currency via Gilboa type dollar debentures, or via financial instruments such as options on the dollar exchange rate (use of these instruments calls for sophistication, and investors should obtain specific advice). For the short term, foreign-currency-linked deposits are an investment option.

Shares

As a short-term option, the share market is risky, due to economic uncertainty (what is going to happen with the budget?..), and political uncertainty. For the longer term, Tachlit believe the share market can be expected to benefit from the budget cut, from the lowering of the interest rate and from lower price levels, and they expect this channel to prove very well worthwhile in the long term.

Their recommendation is to focus on export companies that will suffer less damage from the anticipated market slow-down and also on highly marketable shares. They especially recommend a portfolio spread among a large number of shares, including Karam shares. Qualifying this last recommendation, Tachlit note that in view of the risk inherent in Karam shares, investment in them should not amount to more than 25% of the portfolio.

Recommended Shares:

1. ICL (Israel Chemicals): This is an export-oriented company presently undergoing a big investment impetus, and which can expect to benefit from the growth in the world-wide chemicals industry. An improvement can be expected in the profits of the subsidiary company, Dead Sea Works, as it begins to market magnesium, and those of Dead Sea Bromine.

2. IDB Development: the spread covers a diverse range of economic branches, including attractive investments such as Cellcom.

3. Makhteshim: an export-oriented company, a world leader in its field.

4. Properties and Buildings: A company engaging in high-yield real estate and residential construction. It has a low-risk profile due to its stable balance sheet structure (good financial strength). The company has plenty of lands recorded in its balance sheet a historical values, whereas their real value is much higher.

5. Supersol: Israel’s leading foodstuffs marketing chain-store. Financially very sound. The company presents a consistent increase in sales and profitability, and this trend is expected to be reinforced in the future as shoppers switch from neighbourhood stores to supermarkets.

6. Bank Hapoalim: The bank is traded at less than shareholders’ equity and at a value higher than the low profit (p/e ratio) it presents. The bank has non-financial holdings recorded in values lower than their real value.

7. Bank Leumi: This bank has low capital and p/e ratios. The bank is in process of reducing expenses and downsizing. It has extricated itself from losses incurred at its New York branch, and the spin-off and sale of Africa Israel will contribute to an increase in its profits.

8. Clal Insurance: This company trades at a low p/e ratio, and has a very big life assurance portfolio yielding high profits.

9. Clal Electronics: This company trades at a value 30% lower than the aggregate value of its holdings. A further improvement is expected in the financial results of ECI, while Scitex is expected to launch a turnaround plan.

10. Bayside Land Corporation: This company deals in high-yield real estate, which benefits from long-term rental contracts and a low risk.

11. Harel Hamishmar: an insurance company with a high life assurance component. Holds attractive investments such as the Tel-Ad company.

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