The rise on the Tel Aviv Stock Exchange over the past few months has led Merrill Lynch to reassess its position on investing in Israeli stocks, as the rally in Tel Aviv slows in comparison with other emerging markets.
"While year to date the MXIL (Morgan Stanley Capital Israel Index) has outperformed emerging markets by 5%, since the onset of the bear market rally in March Israel has underperformed emerging markets by 20%," analysts Haim Israel, Micha Goldberg, and Turker Hamzaoglu note. "Looking ahead to the remainder of the year, we think Israel’s defensiveness is likely to be less effective than in the past 12 months," they write, adding "Following the Israeli market’s strong performance, Israel now trades at a premium to EM as the “P” of the P/E has increased by 12% YTD, while the “E” has declined by 13%."
On the Israeli economy in general, the analysts see a worsening picture for the erst of 2009. "As the global growth and trade volumes have taken a sharper than expected turn for the worse, so has the Israeli economy, which now heads deeper into recession. While Israel’s strong fundamentals and robust macro performance of recent years put it on a strong footing, the economy has mainly been hit by the deep recession in its key trade partners. We now expect the real GDP to contract 2% in 2009, unemployment rate to increase to 8%, the current account to post a surplus of 0.3% of GDP, and the budget deficit to widen to 5.5% of GDP," their report says.
Despite the gloomy macro outlook, according to the Merrill Lynch team there are signs of an easing in the credit market, and further potential for local money to move into stocks.
"We estimate that local institutions bought some NIS 10 billion in equity during Q1 (c.15% of Q1 turnover). Even so, cash levels remain at close to peak levels (c.5%), suggesting locals could, theoretically, ‘pour’ another NIS 13 billion into the TASE. Likewise, there are initial and selective signs that local credit markets are starting to unlock. Since March, we have seen some $2 billion in institutional demand for corporate debt, possibly indicating that the non-banking credit crunch is starting to ease. If this trend continues, it could relieve pressure on the local banks."
Merrill Lynch no longer sees being overweight on the Israeli market as making sense. Instead, the analysts point to certain stocks that will still prove good defensive bets, picking out Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA), Bezeq (TASE: BZEQ) and Israel Chemicals Ltd. (TASE: ICL). "We estimate that a selection of the three names will give more than twice the dividend yield of Israel," they conclude.
Merrill Lynch is owned by Bank of America.
Published by Globes [online], Israel business news - www.globes.co.il - on April 16, 2009
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