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Israel Common Values 2Q18

June 30, 2018

Market Backdrop

Israel’s economy continues to enjoy strong momentum.  Although GDP growth decelerated in the second quarter, it remains well above most developed economies with second quarter GDP growth at 2% QoQ in annualized terms, or 3.8% YoY.  Expectations are that the economy will grow around 3.5% in the coming years.  The labor markets remain tight with unemployment at record lows and the labor participation rate at all-time highs.  This tightness has led to accelerating wage growth which has increased to the 4% level from 2% growth a year ago.  Moreover, higher oil prices and a depreciating shekel in the last few months also added to price pressures and have led to a rise in inflation in the country to the most recent reading of 1.4% YoY in July.  Although inflation is now within the 1-3% target range of the Bank of Israel (BoI), most do not expect the central bank to hike rates until 2019.

Bank of Israel governor Karnit Flug is concerned about tightening too soon and was recently quoted as stating that “increasing the interest rate before the inflation rate is entrenched is liable to delay the entrenchment of the inflation rate in the target”. Most believe she will allow for inflation to remain in the 1-3% target range for an extended period before making any aggressive moves to tighten monetary policy. The strong economic momentum is also seen in strong consumer and business confidence. In addition, the move from the Trump administration to withdraw from the Iran deal has also emboldened prime minster Netanyahu’s chances of remaining in power as many in his coalition supported his participation with the Trump administration in the Iran decision.

Performance and Attribution

The Timothy Plan Israel Common Values Fund underperformed the TA-125 benchmark index for the quarter.  The culprit was the strong rebound in the health care sector, led by Teva (screened out), where the Fund is significantly underweight.  While sector allocation was negative due to the underweight in a strong health care sector, stock selection was more neutral for the quarter.  Positive stock selection in the IT and Energy sectors was somewhat muted by negative selection in Financials and Health Care.  In IT, good performance from CyberArk Software and Mellanox Technologies led the way.

Outlook

The strong domestic economic environment is supportive good earnings growth for the non-financials corporate sector.  While global trade tensions and increased geopolitical tensions in the region have increased volatility, strong domestic demand continues to support corporate earnings.  We remain constructive Israeli equities over the next twelve months and anticipate continued strong economic growth.

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Israel Common Values  / Manager Commentary

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