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Israel Common Values

15 Sep 2020

Market Backdrop

The economic consequences of the lockdowns due to the coronavirus are being felt throughout.  Unemployment has risen rapidly, and economic activity has slowed significantly.  The Bank of Israel Research Department now estimates the country’s GDP to contract by 6% in 2020 but bounce back strongly in 2021.  Immigration into the country has also fallen rapidly but we expect pent up demand once the coronavirus come sunder control in the country.  While the country re-opened businesses and activity in the quarter as the virus appeared to be under control, a new wave of infections has forced the government to reclose and reinstate some lockdown measures, again affecting economic activity. Given the new measures we expect GDP growth may be affected even more than recent estimates.

Much like most governments around the world, the Israeli government has also been forced to open its wallet in order to provide some support to families and businesses negatively affected during this pandemic.  The government has issued direct payment to individuals and families and is providing other support measures such as loan guarantees and reduced tax rates in certain transactions.  Debt to GDP will go up this year but we expect a normalization and resumption of strong economic dynamics to continue longer term as the pandemic is in the rear-view mirror. In addition, from a monetary standpoint, the Bank of Israel continues to offer and expand its policies to offer support to banks and the economy.  Its most recent announcement was historic for Israel, as it announced its first ever purchasing of corporate bonds in the secondary markets, providing aid to corporates amid targeting to lower credit cost.  With inflation well below the targeted range, we expect the Bank of Israel (BoI) to maintain a dovish approach for the foreseeable future. The BoI has also continued its activity in the currency market selling shekels in order to maintain an adequate exchange rate, helping the export sector.

Performance and Attribution

The Timothy Plan Israel Common Values Fund bounced back after the steep selloff caused from the coronavirus aftershocks.  The Fund continued to outperform the benchmark TA-125 index during the quarter.  Both sector allocation and stock selection helped the outperformance.  From a sector allocation standpoint, an overweight to IT and underweight to Real Estate helped while an underweight to Health Care hurt performance.  From a stock selection standpoint, good selection in Consumer Discretionary, Industrials, and Financials provided good alpha.  Good performance from Maytronics (Consumer Discretionary), Nova Measuring Systems (Technology), and Tel Aviv Stock Exchange (Financials) were helpful to the quarter’s outperformance. Not owning screened out Teva or LivePerson during the quarter hurt performance.

Outlook

Although much uncertainty remains as to the resumption of “normal” economic activity, we remain cautiously optimistic that earnings will recover over the next twelve months underpinned by a strong economic expansion. 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 trend in the country supports attractive corporate earnings growth and equity prices.

15 Sep 2020

Market Backdrop

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).

Outlook

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.

2 Dec 2019

Market Backdrop

While the Israeli economy remains on a solid footing, momentum has slowed a bit, mostly due to global growth concerns.  The manufacturing slowdown that has gripped most of the developed world appears to have caught up to Israel as well as the most recent Israel Manufacturing PMI index plunged to 44.3 in August from 52.2 the previous month.  The Bank of Israel (BoI) agrees with the slower growth as it reduced its estimate for GDP growth for 2020 from 3.5% to 3% on the back of a global growth slowdown and on expectations the government may take steps to reduce the fiscal deficit which at over 3% remains stubbornly above desired levels.

The Bank of Israel has done an about face after sticking to its aggressive hawkish tone in the early part of the quarter, it now appears has shifted to a dovish tone with some observers even thinking that the BoI may lower rates sooner rather than later.  While the benchmark rate sits at 0.25% there is not much room to lower rates.  The Monetary Committee of the BoI noted in a recent release that “if necessary, the Committee will take additional steps toward making monetary policy even more accommodative…”  Some expect foreign exchange intervention to come back in vogue as the shekel appreciation year to date has dampened exports and led to deflationary pressure.  Inflation now at a low 0.6% over the last twelve months has disappointed and has caught the BoI by surprise making it more likely they will cut rates and provide more monetary accommodation in the near term.

As far as politics, the second national elections this year led to similar results of no party or coalition winning an outright majority.  After days of significant negotiations, president Reuven Rivlin again handed prime minister Netanyahu the challenge to secure a coalition to rule the next Knesset.  There are calls for a broad-based unity government while some think the prime minister may not be able to form a coalition and president Rivlin will then task Blue and White leader Benny Gantz with the goal of forming a ruling coalition.  There is much uncertainty on the makeup of the next government.

Performance and Attribution

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The Timothy Plan Israel Common Values Fund closely matched the performance of the TA-125 index for the quarter, maintaining its strong lead for the year to date period.  Sector allocation was positive with good allocation in Technology, Health Care, and Energy while Stock selection was challenged from weakness in the Technology sector.  Security and cyber-security plays such as Checkpoint Systems, Verint Systems, and CyberArk Software all took a pause in the quarter.

Outlook

The strong economy continues to support robust corporate earnings growth.  The labor market remains robust providing good visibility towards continued strong consumption. Some of the economic challenges are caused by the high demand in inward investment and new energy revenues that provide a good long term fiscal and trade tailwind.  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.

13 Aug 2019

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.

8 May 2019

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.

12 Nov 2018

Market Backdrop

Israel’s economy continues to grow at a solid pace.  Bank of Israel (BoI) research department forecasts GDP growth of 3.7% in 2018 and 3.6% in 2019.  The labor market remains tight with the unemployment rate hovering around 4%, slightly higher than the record low of 3.7% recorded in January of this year.  Annual inflation has now bounced into the lower end of the target range of the BoI of 1-3% but does not appear entrenched there yet.  Most analysts do not expect the BoI to raise rates until the inflation data remains entrenched in this range for a period.  Economists do expect for the BoI to begin raising interest rates from the current 0.10% beginning sometime in 2019.  The Monetary Policy Committee (MPC) of the BoI states that the main risk today of inflation not remaining entrenched in the target range is the possibility of a sharp appreciation in the shekel.  With major exports of the Leviathan natural gas field beginning as early as the end of 2019, the government is doing all it can to make sure the currency does not appreciate quickly from the additional foreign currency earnings.

 

Home price declines appear to have halted in the near term while volumes have rebounded after a prolonged decline since the middle of 2016.  New mortgage volumes have risen recently, and any expectations of rising rates may put some additional life into the mortgage markets as home buyers anticipate higher rates going forward.  Consumer confidence remains above average increasing recently for both current conditions and expectations.  The most recent manufacturing PMI did decline some but remains above expansionary levels.

 

Performance and Attribution

The Timothy Plan Israel Common Values Fund performed well on an absolute basis and closely matched the TA-125 benchmark index for the quarter.  Sector allocation was positive while stock selection suffered a bit.  From an allocation standpoint, the bright spot was an underweight to the Health Care sector which underperformed.  Individual stock selection was hampered by negative selection in the Energy, Materials, and Consumer Discretionary sectors.  Strong performers for the quarter included the insurance industry with holdings Clal Insurance and Migdal Insurance performing well.  In addition, cyber security firms performed well with CyberArk Software and Checkpoint Software leading the way.  Negative selection was in not owning Sodastream which rose sharply after being acquired by Pepsi and being underweight the index weight of Israel Chemicals which performed well.

 

Outlook

The strong domestic economic environment remains supportive of 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.  Recent deceleration in economic activity in Europe may dent near term export demand but we remain constructive Israeli equities over the next twelve months on anticipated strong earnings growth. Renewed mortgage activity and the anticipation of rising rates may also give new life to the Financials sector.

30 Jun 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.