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Israel Common Values

13 Aug 2019
Reading Time: 2 minutes

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
Reading Time: 3 minutes

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
Reading Time: 2 minutes

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
Reading Time: 2 minutes

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.