Strategic Bi-Weekly Review - March 10th 2013
Market & Economy
The recent market results continue to be moderate, with no actual deterioration in the market being recorded. For example, between November and January there was a decline in the import of investment products, tourist nights in hotels, export of commodities, import of raw materials and industry revenue and the growth in the industrial production slowed down.
However, the credit card purchases and chain store revenue increased and the Consumer Confidence Index pointed to an improvement in the perception of the general and employment conditions and an improvement in the purchasing sentiment. The Bank of Israel identified an improvement in the expectations for activity in the business sector and according to the interest announcement; there might have been a clear improvement in January.
We maintain our estimate that GDP will increase at an annual rate of at least 2.5%-3% in the next few quarters. Given the situation abroad and other additional factors, this is a satisfactory rate.
The Israeli stock market
The stock market has been fairly static since the beginning of the month, with slight increases in some of the indices and slight decreases in the other indices. The second tier stocks led with an increase of approx. 3%, and on the other hand, the banks' stocks dropped 1%. These results lagged behind the stock markets abroad; the world MSCI index went up approx. 2%, and was led by the US, Europe and Japan.
In the coming weeks, the stock markets will be affected by political events (the visit of the US President) and security events (the tension in the occupied territories and the events in Syria). At the same time, the financial statements will reflect the slowdown in the market. The volatility may be high.
The Israel Forex market
The ILS appreciated 0.4% against the USD since the beginning of the month, due to a 0.75% increase on Friday. On the other hand, the EUR depreciated against the USD at a similar rate, so that it can be said that that the slight increase of the ILS was due to local events. However, prior thereto the USD declined sharply against the ILS, a move which was stopped by the global recovery of the USD and the political and security question marks, and will not renew soon according to our estimate.
Looking forward, challenging budgetary, political and security environment and a (low) chance that the interest rate will decline will not support the ILS.
Israel Government bonds
In the coming days, the government bonds will trade in anticipation for the February Consumer Price Index, and will follow the events in theUSand the bi-annual budget which will be determined inIsrael.
The yield to maturity on zero coupon bond 314 (1.67%) slightly increased since the last review, but does not rule out a (slight) chance for reduction of the interest rate.
0-2 years: nominal ILS bonds with this duration bear 1.72% yield to maturity and reflect a 2.2% increase of the CPI (0.4% lower than our last review). This level is higher than our work assumption (2.2%), but in view of estimates that the indices in February and March will be low, the nominal ILS channel is slightly preferable.
2-5 years: nominal ILS bonds bear 2.46% yield to maturity and reflect a 2.4% increase of the CPI (0.1% higher than in our previous review). This level is slightly higher than our work assumption and therefore the nominal-ILS bond has a slight advantage.
5-10 years: Nominal ILS bonds bear 3.69% yield to maturity and reflect a 2.5% increase of the CPI (0.1% higher than our previous review). The spread of the yields to maturity from the 10 year treasuries, slightly declined to 1.8% and slightly reduced the extent of protection from jump in the yields to maturity overseas. Nominal-ILS bonds have a slight advantage in this duration as well, but the profitability of the duration will be largely affected by the extent of the deficit in the 2013-2014 budget.
10+ years: nominal ILS bonds bear 5.18% yield to maturity and embody a 2.6% increase of the CPI (same as in our pervious review). The duration risk is significant in this period, and in view of the budgetary question marks, this channel is not recommended.
We estimate that the bond market will wait for the new government and budget, the interest rate will remain the same and the indices will begin to rise. The yields to maturity in the US will be observed.
The spread of the yields to maturity between the floating rate bonds and BOI's zero-coupon bonds is approx. 0.2% (slightly lower than our last 4 reviews), and does not reflect a high chance for further reduction of the interest rate.
Israel Corporate bonds
This channel lags behind the stock market since the beginning of the year, however, it had a slight outperformance this month, and the Tel Bond 20 index added 0.6%. As a result, since our last review the spreads from the government bonds declined as follows: in A rated bonds from 2.4% to 2.2%, in AA rated bonds from 0.9% to 0.8%, and in AA+ bonds from 0.65% to 0.6%.
Interesting spreads can be found in some of the corporate bonds with the assistance of our list.
On Friday, there was a report in the US of a significantly higher number of job vacancies than expected, and a surprising decline of the unemployment rate to 7.7%. In the Eurozone, the economy is slower, and a decline of 0.6% in the GDP was reported last quarter, as well as a jump in the unemployment rate to almost 12%. In Japan, the enthusiasm of the expected budgetary and fiscal incentives is sensed and the depreciation of the Yen and the jump of the Nikkei 225 demonstrate it well. The government in China is treading water and fighting the heating up of the housing market by limiting the residential credit.
The stock markets will wait for the economic news from the US (regarding the debt ceiling and the cutbacks). The Eurozone will continue to tread water; Japan, on the other hand, is showing very positive signs. We estimate that the increases in the stock markets abroad will continue, but will be moderate and not as high as in the beginning of the year.
The Euro depreciated only 0.4% against the USD since the beginning of the month, in view of the subsiding doubts as to further bond purchase by the US FED. The USD status as a safe haven currency slightly declined, which was also manifested in the renewal of the increases in the stock markets worldwide.
We estimate that the USD/EUR rate will range from 1.25 to 1.35, around the mid-range.
Oil and oil products
The increase in the USD rate and the global moderate economic results led to further decline of 3% in the price of crude oil since the beginning of the month. However, the encouraging employment numbers in theUSmay cause the direction to change in the coming days.
We estimate that after its significant decline in the recent days, the slowdown in the rise of the USD and the employment numbers in the US, the price of the oil price may rise in the near future.
The prices of the industrial metals declined between 1% and 2% since the beginning of the month. Among others, this was a result of the rise of the USD and the slowdown inChina, and the concern of the limitations which were imposed there.
We shall note again that without an actual turn in the global economy, there will be no breakthrough in this sector.