Stock Market
In the short term the stock market is likely to be favourably affected by:
- The inclusion of 23 selected shares of the Tel Aviv Stock Exchange in the new global index FTSE All-World, which will cover 49 stock exchanges world-wide, and will be published daily on information networks throughout the world. This may attract new foreign investors to put their money into Israel. Also, Israel will be included in the index in the advanced emerging market category, in contract to its previous classification of emerging market only.
- The Ministry of Finance has modified its directives concerning investment by insurance companies, which may now increase their investments in shares from 15% to 25% of a portfolio participating in profits. This change is still not being fully utilized. We estimate that some of this money will enter into Israel's capital market in the near future.
- The death of Syrian President Hafez Al-Assad and the visit of Secretary of State Madeleine Albright may get the peace process back on an advancing track.
- The improvement noted in the financial results of companies in Israel in the first quarter will evidently persist also in the second quarter of 2000. An improvement in the aggregate sales of industrial companies is due mainly to the increase in sales by exporting companies, and less to companies selling in Israel. An improvement in operating profit margins is due to the decrease in administrative and general expenses, despite the rise in oil and metal prices.
- After six successive interest rate this year in the US, the Federal Reserve has left the interest rate unchanged, since certain indications point to a slowdown in the US market growth rate (which could put the brakes on inflation), and this may produce a further improvement in the positive atmosphere on US stock exchanges.
- In July, the government will commence its 2001 budget debates. The Ministry of Finance assesses that the economy is in advanced stages of emergence from the recession; economic growth in 2000 will approximate 4% and growth in 2001 will be higher. Tax collection surpluses this year (income tax, real estate taxes, customs duties and value added tax), will leave more than NIS 8 billion in the State coffers. The 2000 state budget deficit will be much lower than the target set by the government (2.5% of GDP), and the deficit target of 1.5% of GDP set for 2003 may be achieve this year.
- Recently published economic indicators point to ongoing economic recovery and an increase in growth. The combined index rose by 0.8%, industrial output was up in January-April by an annualized 10%, imports of investment goods increased, and exports by Israeli companies were also up.
In the short term the stock market is likely to be negatively affected by:
- Governor of the Bank of Israel Dr. David Klein has announced that the interest rate for July will remain unchanged, for the second time in succession, thereby suspending the interest rate reduction process of recent months. The high Consumer Price Indices recently published, 0.5% for April and 0.9% for May, and the relatively high Consumer Price Index forecast for June (6% according to Bank Hapoalim's economic department) are relatively high. It is thus likely that for the next few months, David Klein will keep the nominal interest rate at its current level.
- The solution of the coalition crisis and the departure of Meretz leave a fragile coalition, which will evidently continue to extract very substantial resources from the government, sometimes even at the expense of economic plans and reforms.
- Next week, a renewal of the "devils' dance" between the Ministry of Finance and the Histadrut concerning the implementation of the Ben Bassat committee's recommendations can be expected. The Ministry of Finance intends to submit a full draft of the bill as early as next week, in anticipation of presenting it for first reading before the summer Knesset session ends. The Histadrut, for its part, is threatening to bring the economy out on strike if implementation of the reform commences. It is still not clear which of the Ben-Bassat committee's recommendations will be put into effect, if any; in our assessment, however, the capital market will, in fact, be taxed. This taxation will equalize taxation on shares traded on the local market with those traded on foreign markets, and will probably divert part of the domestic market activity abroad. In addition, the reporting obligation is expected to reduce trading turnovers, due to the probable downturn in day-trader activity.
- Recently registered on the primary (issuance) market were a number of companies that had planned issues, and decided to postpone them or cancel them altogether, due to fears that the market is not prepared to absorb them at this juncture. This is much more conspicuous in issues by technology companies, and it may be assumed that even those issuing successfully in the near future, will do so at price levels significantly lower than the levels of just a few months ago, when there was a spate of technology issues.
In our assessment, the positive stock market trend will persist, albeit at a moderate pace, mainly due to expectations of good Q2 corporate reports, the positive indicators still being published pointing to economic recovery, Israel's inclusion in the FTSE All-World index (which may attract foreign investors), the braking of the interest rate hike process in the US, and the possibility of getting back onto the peace process track with both Syria and the Palestinians, following Madeleine Albright's visit to Israel and the death of the Syrian President.
On the other hand, a great deal of uncertainty still prevails, due to the unknown fate of the Ben-Bassat recommendations, the relatively precarious position of the "new" coalition, the braking of the interest rate reduction process, and the influence of overseas stock exchanges.
Since we assess that, in the near future, the stock market will continue to float at around its current level, with a positive inclination, we recommend taking the opportunity to examine the composition of the portfolio and upgrade it.
In view of possible short-term volatility in the stock market, we again recommend hedging the stock portfolio by the purchase of Put options.
The Bond Market
The negotiable capital raising plan for July includes: NIS 800 million in Shachar 5 bonds; NIS 400 million in Shachar 7 bonds; NIS 1,200 million on Gilon 10s, and NIS 300 million in Galil 15 bonds, for a total of NIS 2.7 billion. This compares to redemption and interest received amounting to NIS 4.65 billion, of which NIS 350 million is in index-linked instruments, NIS 1.4 billion in dollar-linked and NIS 2.9 billion in shekel instruments.
Foreign currency-linked
It is assessed that the dollar exchange rate will continue stable in the short term.
However, in view of the persistent uncertainty concerning the coalition, which aggravates uncertainty as to the possible implementation of the Ben-Bassat regulations, expectations that interest rate differences between Israel and other countries will remain at their current level, and the forthcoming redemption of NIS 1.2 billion of Gilboas at the beginning of July, while the Ministry of Finance will not issues Gilboas in July, the foreign currency market is still pervaded by uncertainty for the near future. We therefore recommend holding up to 20% of a solid portfolio in this instrument.
For those undecided as to whether to choose the shekel or the foreign currency instrument for the medium term, we would propose one-year shekel/foreign currency option deposits and a shekel/dollar option (for a period of three months to one year).
For those wishing to choose between an index-linked, dollar linked or shekel investment, we propose the three-way option.
Index-linked
Despite expectations of relatively low consumer prices indices commencing in July (June: +0.6%; July; +0.2%: August: +0.3%, according to Bank Hapoalim's economic department), expectations for the next twelve months are +3.6% for the next twelve months (according to Bank Hapoalim's economic department). Since index-linked yields have recently risen to a relatively high level, we recommend, for investors interests in gross returns, holding up to 25% in this instrument, in index-linked bonds with a gross yield of over 6.5%, 5.8% and 5.4% for the short, medium and long term (respectively), and in Kfirs with an incremental yield of over 1.1%.
Due to marketability problems with index-linked bonds, investment in this instrument may also be made via index-linked mutual funds.
Also worth investing in are index-linked savings schemes currently offering good yields.
Shekel Instruments
The real interest rate continues high, lending greater attractiveness to short term (up to one year) shekel deposits at a fixed or variable rate of interest, which will enjoy a tax exemption until year-end (if the Ben Bassat recommendations are implemented in full).
At current levels of yield, we recommend focusing, in this instrument, on shekel deposits and STLs and Gilons.
Long-term Gilons offer two-fold hedging, both against tax and against unexpected interest rate developments, but their current level of yield only partially reflects the tax benefit and they are therefore attractive.
In view of the uncertainty as to which direction the interest rate will take in the future, one may invest in the option deposits that provide extra "financial security" - an option between the prime interest rate and the fixed shekel interest rate, whichever is the higher, providing hedging in case of a interest rate cut.
Small and medium investors can look to the Pekan Interest Rate Plus fund to improve the effective interest rate level they receive.
Published by Israel's Business Arena on 2 July 2000