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While Israel entered 2020 on a solid footing economically, it is not immune to the domestic and global pause in economic activity caused by lockdowns as a result of the COVID-19 virus. The International Monetary Fund (IMF) now projects Israel’s GDP for 2020 to decline by -6.3% and suffer a temporary bout of deflationary pressures as a result. The domestic and global economic shock forced the Bank of Israel (BoI) to implement unorthodox monetary policy once again (last time was in 2008). The BoI lowered interest rates by 15bps to 0.10% in early April. The bank also announced a loan program to small businesses at low fixed rates for three years’ worth ILS5bn. In addition, the bank also implemented QE once again and started buying government bonds of various types and maturities.
The Israeli economy has not been immune to the lockdowns seen across the globe. It is certain to experience some short-term pains with a major increase in unemployment and reduced investment and spending. Second quarter GDP is likely to be a double-digit negative with unemployment rising quickly. Corporate earnings will be affected but should setup for strong growth in 2021. That said, Israel’s economy comes into this crisis with one of the lowest debt/GDP ratios in the developed world and a fast-moving entrepreneurial business sector.
After three elections, the government was finally able to form a coalition between Netanyahu’s Likud and a faction of Benny Gantz’ party. The emergency government will see Benjamin Netanyahu in power as prime minister for the fist 18 months of the 3-year caretaker government and Benny Gantz moving onto the premiership in the subsequent 18 months. This government will hold a record number of cabinet positions as both parties negotiated plenty of their lieutenants to be part of the government. It is seen as a major win for Netanyahu given his impending court case. The COVID-19 virus gave Benny Gantz an excuse to agree to a coalition that many of his supporters claim is contrary to the ticket he ran on against Netanyahu. We are glad to see a conclusion to this but do expect some growing pains as coalition governments tend to have difficulties staying in power for a long period of time and agreeing on tough items.
Performance and Attribution
The Timothy Plan Israel Common Values Fund was not immune to the global selloff in stocks and the TA-125 index. While it outperformed the index, the Fund suffered in this market environment. Sector allocation was negative for the Fund for the quarter mainly given the large underweight to the Health Care sector which was the best performing sector for the quarter. Yet, stock selection more than offset the negative sector effect with strong selection in Consumer Discretionary, Consumer Staples, and Real Estate all providing a nice boost for the Fund relative to the index. Key stocks providing the positive alpha for the Fund in the quarter included Novolog (Health Care), Mellanox (Technology), and Rami Levi Chains (Consumer Staples).
COVID-19 has thrown a wrench in the economic expansion but Israel’s economy and corporate earnings will not stay down for long. While much uncertainty remains as to the resumption of “normal” economic activity, we remain cautiously optimistic that the best minds in the world all focused on one problem and a solution will ease the health care uncertainty. We remain constructive Israeli equities over the long term as the innovation of Israel corporates, accommodative monetary policy, and the strong long-term economic growth in the country supports corporate earnings growth and equity prices.