Market Backdrop

Economic activity in Israel remains on a solid footing while the Bank of Israel (BoI) continues to support the economy with fairly dovish policy.  The Composite State of the Economy Index rose in March 2019 at a similar pace of the previous 12 months as the economy continued to perform well, supporting continued corporate earnings expansion.  The BoI’s research department forecasts GDP growth of 3.2% in 2019 and 3.5% in 2020 as a result of continued solid corporate investment.  One example of the attractiveness of investment in Israel is Intel’s announcement in January that it was planning to expand its manufacturing capacity in Israel and invest over US$11bn, creating thousands of jobs in the country.  The Bank of Israel expects inflation to remain slightly above the lower band of its expectations above 1% over the coming year, clearing a path to very gradual interest rate increase.  The Monetary Committee of the BoI stated in its latest decision to keep interest rates unchanged at 0.25% that it “…assesses that the rising path of the interest rate in the future will be gradual and cautious…”.  This accommodative stance from the BoI will continue to be supportive to Israeli equity markets.

Prime minister Benjamin Netanyahu appears to have cemented his reputation as a political survivor after the April national elections showed his Likud party in the driver’s seat to form a new coalition government.  President Reuven Rivlin has tasked the Likud party days to form the new government, likely to be made up of Likud and ultra-Orthodox and right leaning parties after Netanyahu’s Likud party and his coalition members won a majority of the Knesset seats in this election.  This, in spite of the likely outcome of the prime minister to be indicted on charges of corruption later this year. A new centrist party, Blue and White, could remain a formidable challenger to the ruling coalition in the future.

Performance and Attribution

Economic activity in Israel remains on a solid footing while the Bank of Israel (BoI) continues to support the economy with fairly dovish policy.  The Composite State of the Economy Index rose in March 2019 at a similar pace of the previous 12 months as the economy continued to perform well, supporting continued corporate earnings expansion.  The BoI’s research department forecasts GDP growth of 3.2% in 2019 and 3.5% in 2020 as a result of continued solid corporate investment.  One example of the attractiveness of investment in Israel is Intel’s announcement in January that it was planning to expand its manufacturing capacity in Israel and invest over US$11bn, creating thousands of jobs in the country.  The Bank of Israel expects inflation to remain slightly above the lower band of its expectations above 1% over the coming year, clearing a path to very gradual interest rate increase.  The Monetary Committee of the BoI stated in its latest decision to keep interest rates unchanged at 0.25% that it “…assesses that the rising path of the interest rate in the future will be gradual and cautious…”.  This accommodative stance from the BoI will continue to be supportive to Israeli equity markets.

Prime minister Benjamin Netanyahu appears to have cemented his reputation as a political survivor after the April national elections showed his Likud party in the driver’s seat to form a new coalition government.  President Reuven Rivlin has tasked the Likud party days to form the new government, likely to be made up of Likud and ultra-Orthodox and right leaning parties after Netanyahu’s Likud party and his coalition members won a majority of the Knesset seats in this election.  This, in spite of the likely outcome of the prime minister to be indicted on charges of corruption later this year. A new centrist party, Blue and White, could remain a formidable challenger to the ruling coalition in the future.

Outlook

The strong economy continues to support robust corporate earnings growth.  While the recent election, fighting in Gaza, and the upcoming likely indictment of prime minister Netanyahu lead to potential distractions that could lead to added volatility for equity markets. We remain constructive Israeli equities over the long term as the innovation of Israel corporates and the strong economic growth in the country supports equity prices.

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