What Is the Outlook in July for the Israeli Equity Market?

Just when it looked like investors should throw in the towel after Brexit-induced selling, stocks may now be perking up.
By Steven Schoenfeld ,

What were the main drivers of the Israeli equity market last month, and what is the outlook for July?

Last month, the news that U.K. voters decided to leave the European Union sent global equity and currency markets into another bout of extreme volatility. Although U.S. equities, as measured by the S&P 500, recovered nearly all their post-Brexit losses, other developed market equities, as measured by the MSCI EAFE, ended the month in negative territory but off their lows.

Israeli global equities, as measured by the BlueStar Israel Global Index, or BIGI, declined 2.17% last month, while Israeli global technology equities, as measured by the TASE-BlueStar Israel Global Technology Index, or TA-BIGITech, declined by just 0.50%. The TA-BIGITech handily outpaced other tech stock benchmarks last month, including the Nasdaq 100 which declined by more than 2%, despite a flat month for the broader U.S. equity market.

The information technology sector gained 0.67% last month as a result of the performance of some of the largest companies in that sector, including Amdocs, CyberArk, Imperva, Mobileye and Wix.com. Some of the key drivers of these stocks are highlighted below.

It is interesting, though not surprising, to note that companies that rely heavily on global trade, aside from technology, were hit hardest last month. This includes materials (the worst-performing sector in the BIGI for the second straight month), health care and consumer discretionary stocks, all of which are likely to feel any ill effects of the Brexit most acutely.

The Israeli financials sector was down just 1.03% last month, even as its American and European counterparts were among the worst performers in their respective markets. This is a comforting signal that the Israeli market doesn't interpret the Brexit as a precursor to a major domestic financial crisis, even if it may lead to slower economic growth in the short term.

Since 2011, Israeli financial stocks proved to be resilient, despite headwinds to the global financial sector. For example, during the 2011 European debt crisis, Israeli banks weren't severely affected as their exposure to the sovereign debt of the so-called PIIGS countries Portugal, Italy, Ireland, Greece and Spain was limited.

It is too soon to fully understand the potential impact of the Brexit on Israel's economy and equity markets. However, it appears that the Brexit has more to do with the U.K. wanting a greater degree of political/foreign policy independence and a reshuffling of economic output between the country and the EU than its desire to impose severe trade restrictions and regulatory burdens on foreign entities doing business within its borders.

Israel is unlikely to experience major change as a result of the Brexit, as long as the country and the U.K. forge new trade agreements before the latter officially leaves the EU.

The charts below compare the performance of Israeli companies that derive more than 70% of revenue from within the country (the Israel Domestic Exposure Index or IDEI) and the performance of Israeli companies that derive more than 70% of revenue from outside the country (the Israel Global Exposure Index or IGEI). This index family is an important new tool for investors interested in tracking the performance of the industries closely tied to the source of domestic consumption, versus the industries that are closely tied to trends in global trade.

We refer to the BlueStar Israel Global Total Investable Market Index or BIGI-TIM, as opposed to the BIGI, as the benchmark for the full Israeli equity universe.

The industries most prevalent in the IDEI are banks, oil and gas, real estate management and development, insurance, telecommunication services, and food and staples retailers. The industries most prevalent in the IGEI are IT industries such as software, IT services and semiconductors; chemical manufacturers; and health care industries such as pharmaceuticals, health care devices and equipment, and biotechnology.

One of the most interesting relationships between these indexes can be observed on the relative performance chart below. It appears that the IDEI experiences periods of extreme out-performance and under-performance both, relative to the BIGI-TIM and compared with the relative performance of the IGEI.

One of the reasons that this is possible is because of the large weighting of globally oriented companies such as those in the IT, materials and pharmaceutical sectors in the BIGI-TIM. The correlation between the IDEI and BIGI-TIM is much lower than the correlation between the IGEI and BIGI-TIM.

There appears to be some natural mean-reverting level of relative performance or some limit as to how far the IDEI can outperform the BIGI-TIM and IGEI before falling to its mean-reverting level. Given the recent relative performance of the IDEI, we will begin looking for signals of trend exhaustion or reversal in upcoming monthly updates based on both fundamental and technical indicators.

So, what is the bottom line? Well, just as it appeared that the global economy and markets were on the mend, the Brexit pulled us back into extreme volatility and uncertainty.

The outlook for Israeli equities, therefore, continues to be mixed but skewed to the upside. Israel's economy continues to be one of the most stable and fastest-growing developed-market economies in the world.

This is a result of a growing population, recent discoveries of natural resources, a focus on technology and innovation, and a fiscally responsible government. During this period of weak global trade, Israel's economic growth is being led by domestic consumption, both public and private, enabled by a relatively strong currency, a strong real estate market supported by solid fundamentals, and a sound banking system.

Although economic growth in Israel is expected to slow a bit over the next year, it is encouraging that Bank of Israel forecasters are predicting a resurgence in fixed capital investment and exports and rising interest rates toward the end of next year. BlueStar Indexes maintains our cautiously bullish outlook for Israeli equities based on these factors and on our technical analysis.

However, it may be the case that the next major move higher won't come until sometime next year when the fallout from the Brexit is better understood and the Bank of Israel expects normalization in exports, inflation and rate policy.

As for Israeli technology stocks, what were some of the main drivers of the TA-BIGITech's out-performance last month? Despite extreme volatility in the final week and a half of the month, some of the largest Israeli global technology companies performed extremely well on either an absolute or relative basis.

It is important to note that despite short-term market volatility competitive tech companies operating in long-term growth industries will continue to prosper. Global economic growth relies heavily on developments in technology, and Israeli companies are a key source of technological innovation.

Whether the U.K. voted to remain in the EU or not, the world will continue to clamor for access to Israel's cutting-edge technology.

Three companies that warrant a focus for July are Amdocs, Mobileye and Wix.com.

1. Amdocs (DOX) - Get Report (~10% weight in the TA-BIGITech and ~6% weight in the BIGI).
This company has been one of the strongest-performing Israeli stocks in any industry this year. This strength was exemplified last month as the stock ended June flat, while the BIGI ended the month down more than 2% and as of July 6 the stock was trading well above its pre-Brexit closing price.

Amdocs provides software and big-data analytics solutions to the world's leading telecommunication and media companies. The company's solutions are becoming an even more indispensable tool for its customers as traditional telecommunication and media content companies are competing with cloud-based services offered by companies such as Amazon and Netflix, and emerging network infrastructure players such as Alphabet's Google.

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At the same time, Amdocs continues to return much of its impressive free cash flow to shareholders in the form of dividends and stock buybacks. Although Amdocs is more of a traditional tech company than Mobileye or Wix.com, it is important to note the stock's relatively stable performance in the wake of the Brexit vote, which can be viewed as a testament to the value it delivers to its European customers and shareholders.

2. Mobileye (MBLY) (~10% weight in the TA-BIGITech and ~4% weight in the BIGI)
Shares of Mobileye soared 20% in June and ended the month more than 80% above their February lows.

One week after the news of the Brexit rocked global equity markets it was announced that BMW partnered with Intel and Mobileye to introduce a fleet of fully autonomous vehicles by 2021. This news has important implications for the company for a few reasons.

First, since Mobileye's 2014 initial public offering, analysts have cautioned that the company's stock price was difficult to value as it has little competition. Subsequently, each time a company such as Apple or Google announced developments related to autonomous driving, Mobileye's stock price would fall.

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Mobileye's management team also never explicitly confirmed that it was working on fully autonomous driving solutions, rather that the company's focus was on automated driver assistance and safety systems. It is now clear that Mobileye intends to lead its industry in both semi- and fully autonomous driver assistance and safety systems and to compete with global giants in all aspects of the future of transportation technology.

The second important aspect of this announcement is that Mobileye is signaling solid long-term relationships with its key customers. Because BMW is a trend-setting car manufacturer, it is becoming harder to understand how a Google intends to compete with Mobileye in this market, as the company is also a key supplier to virtually every other important car manufacturer in the world.

Finally, it is quite impressive that a global tech giant such as Intel is relying on Mobileye as a partner to enter into this fast-growing market.

3. Wix.com (WIX) - Get Report(~2% weight in the TA-BIGITech and ~1% weight in the BIGI)
This company's shares rose by 11.5% last month after announcing the introduction of its new Artificial Design Intelligence tool. This feature makes the process of building a website even more efficient and user-friendly.

The tool asks the website builder a set of questions and after uploading some content is able to build a full website prototype based on general website users' preferences. Aside from being innovative technology, this feature allows investors to imagine an even wider total addressable market for Wix.com, one that goes beyond builders of new websites to include small businesses that need to update or rebuild old and out-of-date websites.

The company is also partnering with Alphabet/Google to help its customers' websites get discovered by potential customers.

Market Trends & Technical Analysis: BIGI®

The medium-term trend in the BIGI is lower as the index remains below the parallel red trend lines which served as support for the seven-year rally in Israeli global equities off the first-quarter 2009 lows. At the same time the near-term outlook for the BIGI continues to be bullish, despite the pull back last month.

As long as the green trend lines/2016's lows on both the longer term chart (above) and shorter-term chart (below) don't break, they should be viewed as a significant area of support in the short term. Also, the June bottom appears to have formed a tradeable double bottom with a well-defined stop loss level.

However, the April high that coincides with the neckline of a bearish medium-term head and shoulders pattern should serve as significant short-term resistance. The underside of the seven-year red trend lines that coincides with the upper bound of the shoulders of the head and shoulders pattern is expected to serve as very strong resistance over the medium term.

Market Trends & Technical Analysis: BIGITech®

The relative performance of the TA-BIGITech, compared with the BIGI and other global technology indexes is encouraging. BlueStar remains bullish on the TA-BIGITech as long as none of the green uptrend lines are broken, with each of the green trend lines serving as very strong support.

However, it could also be the case that the index is in a bearish consolidation pattern after a break below the seven-year red trend lines. Overall, the TA-BIGITech remains in a better technical position than the BIGI, as it is further above its critical support levels.

This article is commentary by an independent contributor. At the time of publication, the author held individual retirement account investments in the ISRA and ITEQ exchange-traded funds that track the BIGI and TA-BIGITech indexes, of which these companies are constituents.

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