American Israeli Shared Values Fund (AISHX): First Quarter 2012 Update–May 2012
During the three-month period ending March 31, 2012, the benchmark Tel Aviv 100 Index rose 5.52% compared to a 12.59% advance in the benchmark Standard & Poors 500 Index during the quarter. It is likely that the Israeli stock market was negatively impacted by investor unease about the possibility of an Israeli military strike against Iranian nuclear facilities and the possibility of reprisal attacks against Israel. However, as sanctions appear to be hurting the Iranian economy and the war rhetoric subsides, we expect the Israeli market to post better relative returns.
Meanwhile, Israel’s economy continues to grow at a faster rate than most developed Western economies and is expected to average 2.5% growth in 2012. By comparison, the U.S. is expected to experience economic growth of just over 2% this year. Israel’s economic growth stands in contrast to that of the European Union, where annualized GDP growth is flat to contracting in most member countries. In response to the slowing economies of Europe, the Bank of Israel cut its benchmark lending rate three times between September 26th and the end of January in order to spur economic activity and counter headwinds from the European slowdown. The benchmark rate now stands at 2.5%. The Israeli central bank is comfortable lowering rates given the benign inflationary environment there – Israeli inflation slowed to 1.7% in February, its lowest level in four years. Israeli unemployment at the end of December stood at 5.9%, down from 6.6% a year ago but up from 5.6% at September 30th.
Winners and Losers
With the market up nicely in the first quarter, there were numerous significant advancers and just a few noteworthy decliners. The larger gainers were concentrated in the Technology and Financial sectors. During the three month period, shares of EZchip Semiconductor (EZCH) and Clicksoftware Technology (CKSM) rose 52% and 33% respectively after both companies reported fourth quarter earnings that exceeded investor expectations. Shares of Verifone Systems (PAY) rose over 48% after reporting better than expected earnings and an announcement from MasterCard Inc. that it intends to upgrade merchants’ electronic point-of-sale payment systems.
Notable under-performers during the period included Cellcom (CEL), Partner Communications (PTNR) and Elbit Systems (ESLT). Shares of Cellcom Israel and Partner Communications fell 24% and 14% respectively during the quarter. These normally defensive stocks were hit hard after reporting sharply lower profits following an Israeli Ministry of Communication decision to open the Israeli mobile phone service market to increased competition. Given the reduced profitability in the Israeli mobile communications market, we question whether there will be as many new entrants as some fear given the likelihood of low returns for new competitors. Elbit Systems declined 5% during the three-month period–investors continue to be concerned about the company’s growth prospects as most of it military customers face budgetary pressures.
We remain convinced that Israeli equities are undervalued in the current slow growth environment, with interest rates and bond yields at near-record lows. Stocks are responding to increasingly favorable economic conditions and mostly positive fourth quarter earnings reports and management outlooks. We would be surprised if stocks did not go through a period of weakness as some investors may seek to lock in profits following four months of virtually uninterrupted advances. However, as we have stated before, stocks remain inexpensive based on various measures such as price to earnings, price to cash flow, or price to free cash flow, particularly when compared to other investment options such as U.S. Treasury and investment grade corporate bonds.
Jamia C. Jasper
Founder and Portfolio Manager
AmerIsrael Capital Management, LLC
www.AISHX.com | email@example.com
To the extent permitted by law, AmerIsrael Capital Management, LLC does not accept liability arising from the use of this communication. AmerIsrael Capital Management, LLC, a registered investment adviser, serves as investment adviser to the American Israeli Shared Values Fund. Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results. Share price, principal value and return will vary, and you may have a gain or loss when you sell your shares. All mutual funds can be affected by market and investment style risk. The Fund’s investments in small and mid-capitalization companies could experience greater volatility than investments in large capitalization companies. Request a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. The prospectus can be obtained by calling 1-212-327-1345 or by downloading it from the website at www.aishx.com.