Global equity markets experienced significant volatility in September. We believe this volatility was driven by the following factors: fears of a sooner-than-expected rise in U.S. interest rates, concern that the European Central Bank does not have the capacity to revive economic growth and inflation, mixed economic data in the U.S., a stronger dollar driving weaker Emerging Market currencies, and bearish technical indicators/patterns for major U.S. equity indexes. Readers can review our commentary on those factors in last month’s update by clicking here. Despite these global headwinds, Israeli equities performed relatively well in September. U.S. dollar strength and a slowdown in the domestic economy have resulted in a relatively sharp correction in the Shekel/Dollar exchange rate. Although the weaker shekel may eventually increase inflation, it will have a positive impact on the technology sector and other exporters. The impact can also be seen in the US dollar prices of Israeli equities as measured by indexes such as the BlueStar Israel Global Index (BIGI®) and the MSCI Israel index, which underperformed indexes priced in Shekels (e.g. TA-25 and TA-100) which reached new all-time highs during September.
We maintain a neutral outlook for Israeli Global Equities, though with an upward bias for the BIGI® over the next couple of months. Economic growth in Israel has been moderating and is expected to moderate further in the coming months, and as Israeli companies report Q3 2014 earnings, we will get a better sense of how Operation Defensive Edge impacted consumer and business spending during that period. While several medium and long term macroeconomic and industry-specific trends are expected to help extend the current bull-market in Israeli Global Equities, the BIGI® has been consolidating since Q2 2014. Given the precarious global economic situation, we do not see any major near-term (4-8 weeks) catalysts for Israeli Global Equities and as a result we prefer to maintain a neutral outlook. That said, we see loose monetary policy, an expected pick-up in government expenditures in Q4 and a weaker shekel creating an upward bias in the BIGI®. Our comments below and those accompanying our technical analysis charts provide a summary of potential catalysts that would change our view between now and the beginning of November…Read More>>