Goldman Sachs’ latest quarterly report on Israel warns that the country’s credit rating is likely to be downgraded to BBB+ from A- within the next three months, following S&P’s recent lowering of Israel’s credit outlook.
The report, which was published today, also advises investors to underweight their exposure to the Israeli stock market, because of a weak activity outlook.
Referring to the likely credit downgrade, Goldman Sachs said, “The key reasons for the downgrade will be weak activity and the resulting deterioration in the fiscal accounts. Weak domestic demand is cutting tax revenues severely, while the security situation is pushing up defense spending. While we expect a gradual recovery in external demand to support a slight pick-up in exports in 2002, consumer sentiment is likely to remain low as a result of the geopolitical situation.”
Analyst Elan Zivotofsky said, “We do not believe the deterioration in the macroeconomic scenario is priced into asset prices. We would therefore recommend an underweight exposure to local equities…stronger exports should provide support to the high-tech sector, but non-tech stocks will likely suffer from depressed demand and weak consumer sentiment.”
Goldman Sachs is forecasting a gloomy outlook for the Israeli economy in 2002. “We expect GDP growth to reach 1.3% in 2002 following a drop of 1.3% in 2001. In 2002 we expect export growth to show only a mild recovery…Domestic demand growth is likely to be weak due to higher political risk across the region, at 0.2% compared with 1.2% in 2001. The key reason for the expected drop in domestic demand is likely to be weak consumer sentiment as a result of an escalation in the [Palestinian] attacks across all major [Israeli] cities during March.”
Zivotofsky says the negative macro picture is likely to trigger more currency volatility, with the shekel falling to about NIS 4.90 against the dollar in the next month. “We have changed our NIS/$ exchange rate forecast path to 4.85, 4.55 and 4.45, from 4.55, 4.45 and 4.35 previously for the 3, 6 and 12-month forwards, respectively.”
Focus on stocks
“Different Israeli companies face different risks in the current economic slowdown and turbulent political environment,” the report states.” We believe food retail should continue to outperform the local market over the next quarter, primarily due to its defensive nature and cash flow generation…. Bezeq could outperform the local market thanks to its defensive characteristics. Teva (Nasdaq: TEVA) has proven a relative safe haven in a sea of uncertainty.”
Goldman Sachs also sees potential for chemical companies to outperform the market, because they are 90% export based and should see their bottom line positively influenced by the shekel depreciation.
On the other hand, the investment bank believes it is too early to be buyers of Israeli banks, because the negative macroeconomic environment is likely to cause high provisioning and subdued revenue growth in 2002.
In the technology sector, Goldman Sachs said it would focus on companies that continue to demonstrate leadership in their respective areas and are likely to show solid profitability and cash flow generation during 2002. Zivotofsky’s top picks in the technology sector include Amdocs (NYSE: DOX), Check Point (Nasdaq: CHKP), and Mercury Interactive Corporation (Nasdaq: MERQ).
Published by Globes [online] - www.globes.co.il - on 23 April, 2002