Market Backdrop

The Israeli economy remains sound and growing on a sustainable path around 3% per year.  While the Bank of Israel’s research department lowered their GDP growth expectations for 2019 to 3.1% (from 3.4%) and kept 2020 at 3.5% growth, these continue to stand out in a global context of trade wars and economic softness across advanced economies.  Inflation over the last twelve months was at the low end of the Bank of Israel’s 1-3% inflation band, allowing the central bank to continue forecasting a future path of rate increase at a gradual and cautious pace.  Given the year to date rise in the shekel exchange rate and the renewed emphasis by major central banks for more dovish monetary policy, we do not expect that Bank of Israel to continue raising rates in the near term.  The shekel has appreciated over 5% year to date on the back of increasing gas exports (Dutch disease), higher tech service exports, and persistent foreign direct investment inflows.  One area of focus recently has been the increasing fiscal deficit which reached 3.9% of GDP from a year ago level of 1.8%.  While some one-offs drove the difference as compared to the prior year, revenues have been below expectations in spite of low unemployment of 3.8% while expenditures continue to come in above the government ceiling.  We expect an emphasis on the fiscal deficit from the government over the coming year.

Prime Minister Benjamin Netanyahu was unable to form a ruling coalition after the April elections and chose instead to dissolve parliament and call for new elections which will be held on September 17th.  This will be the first time that Israel will hold two national elections in a single year. This is a risk for Netanyahu and his allies. Recent actions have seen left-leaning parties joining forces in the new election poll, placing significant pressure on the chances of a right-wing government coalition.

Performance and Attribution

The Timothy Plan Israel Common Values Fund continued its string of outperformance in the quarter bringing its year to date and last twelve months outperformance versus the TA-125 index to a wider margin. Sector allocation was positive while stock selection was a slight negative for the quarter.  An underweight to the underperforming Health Care sector helped performance while from a stock selection standpoint, good stock selection in Health Care, Financials, and Consumer Discretionary was not enough to offset bad performance in Technology for the quarter.

Outlook

The strong economy continues to support robust corporate earnings growth.  The upcoming election is a risk to markets but the most recent polls suggest a continued split vote that sees little chances of small coalition building and may mean a much broader coalition may have to be built than the right-wing coalitions of the recent past. 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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