Equities market uncertainty unlikely to go away

At least until important matters become more clear, such as the 2003 budget and the attack on Iraq.

The review was written on Thursday October 10, 2002.


The following are the main factors that, in our opinion, are likely to affect the equities market in the short term:



J It seems that the political system understands the importance of having the 2003 budget passed in the Knesset, and this in order to return the trust of investors in the economic leadership and to prevent the fall of the government.

J The decision of D&B not to downgrade the State of Israels credit rating, strengthens the belief that the other international credit rating companies will avoid, in the meanwhile downgrading the credit rating, and this despite the downgrading of the credit rating of Israeli banks in September this year.

J The reports for the third quarter of 2002 are expected to show an improvement in the results of most branches in the economy (including the commercial banks, insurance companies, holding companies, some of the chemical companies and the cable companies) and this in view of the low comparative data for the equivalent quarter in the previous year and the increase in average rates of exchange which are expected to lead to an improvement in the profitability of export companies.

L The historically high returns in the bonds market are an alternative investment to the equities market with a much lower level of risk.

L The difficulties in the US to obtain a consensus regarding the attack on Iraq is likely to lead to an extended period of waiting which will increase uncertainty.

L The possibility that the Governor of the Bank of Israel will once again increase interest due to a fear of a devaluation in the rate of exchange of the shekel against the dollar and this is likely to deepen the recession that Israel is undergoing even more.

L The fear of the continuing decline in world stock exchanges in general, and in the US in particular, based on the weak macro data and the continued publication of profit warnings.

L The fear of a renewal of attacks as a result of continued political security uncertainty is also likely to cloud the capital market in the short-term.

It seems that the uncertainty in the equities market, which negatively affects it, is not a phenomenon that is likely to pass, at least until important matters become more clear, such as the future of the 2003 budget and the date of the attack on Iraq, its results and consequences.

Concurrently, the high interest, at a much lower risk, that exists today in alternative investment channels (such as the bonds market, shekel deposits and saving accounts) makes investments in equities unattractive, and continues to drive the general public away.

Clients with a shares portfolio who fear a continued decline are recommended to hedge their share portfolio by the acquisition of PUT options. We should emphasize that the acquisition of hedging traded today at fairly convenient prices, gives the investor a secure ‘floor’ in the event of a decline in rates.

Published by Globes [online] - www.globes.co.il - on 14 October 2002

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