Israel's economy continues to shine this year, and the prospects for the remainder of 2016 look promising.
Israeli global equities, as measured by BlueStar's BIGI benchmark rebounded sharply last month, rising by nearly 5%.
Israeli global technology stocks, as measured by the TA-BIGITech benchmark, continued to outperform the broader Israeli equity sectors last month, rising 5.5%. Israeli technology is one of the best-performing global sectors this year.
Global equity and fixed-income markets soared last month as a result of a combination of expectations for continued and additional fiscal and monetary stimulus around the world, better-than-expected reports on consumer spending and economic activity in the U.S., and the market's realization that the Brexit vote would likely not be disastrous for the world economy.
Finally, the second-quarter earnings reporting season has shown that corporate earnings continue to be resilient, though not robust. This might be just enough to allow stocks to continue on their upward trajectory, though the shadow of negative interest rates will be difficult to ignore forever.
One reliable investment maxim is that the sectors that lead markets lower during a correction tend to be the first to recover when the correction is over. Indeed, the worst-performing BIGI sectors in June were the top-performing sectors last month including consumer discretionary, health care, industrials and materials.
The reason behind June's market correction, the Brexit, was the main factor that drove markets higher through much of last month. So it should be no surprise that the sectors that have greater exposure to the international trade of goods would have the greatest sensitivity to this trade-related disruptive global event.
Standout performers within the consumer discretionary sector included 888 Holdings, a London-listed gaming software company; Delta-Galil, a global designer, manufacturer and distributor of apparel; Fox Wizel, a major apparel and home goods retailer with operations and suppliers based both in Israel and internationally; and SodaStream, the maker of a home carbonation product.
As I wrote recently, "... regarding Israel, we do not expect much change as a result of Brexit, as long as Israel and the U.K. forge new trade agreements before the U.K. is officially out of the [European Union]."
Last month, the Bank of Israel left its benchmark rate unchanged at 0.10% and said that it doesn't expect to raise rates in the next 12 months. Although over the past 12 months there has been deflation in Israel, prices actually rose when excluding the impact of energy prices.
At the same time, Israel's unemployment rate hit another record low last month, and real wages increased by 2.5% highlighting the underlying strength of the Israeli economy. Aside from the start of earnings season, last month was a relatively quiet month for the Israeli economy.
However, as developed-market policymakers in Europe and Japan continue to lower rates and provide stimulus, they are fueling the bubble in fixed-income assets. Investors seeking to limit exposure to that trend should look to countries with relatively sound fiscal and monetary policy or those that didn't cut rates to below zero such as Israel and the U.S.
This month we had two additional developments of note: Standard & Poor's reconfirming Israel's strong A+ sovereign-credit rating and a key new initiative by the Ministry of Finance to support Israel's vibrant tech sector by lowering tax rates. The former news confirms Israel's robust economy and sound economic management and expectations for continued structural reforms and fiscal responsibility.
The new tax regime for technology companies are part of the Israeli government's efforts to help the sector and will result in corporate tax rates being slashed by half or more and tax on dividends being cut even more.
Some of the themes that I expect to emerge in Israel over the next few quarters concern the balance of growth in the domestic-oriented sectors of the economy compared with the global- and export-oriented sectors of the economy. Although the outlook for inflation remains subdued, it seems only a matter of time before the strength of the Israeli labor market, combined with the relative strength of the domestic-oriented sectors of the Israeli economy, will lead to some inflationary pressures in Israel.
Some inflation is generally positive for business confidence and stocks.
That is why forecasters are predicting a resurgence in the fixed-capital-formation component of gross domestic product next year as a normal level of inflation provides the confidence businesses need to plan and expand. Fixed-capital formation is one of the most important components of GDP in determining a country's longer-term growth prospects.
"... Expansion took place mainly in industries with activity focused on domestic demand -- trade, construction, and transport and communication -- while in the manufacturing, services and hotels industries, the rate of expansion was lower. An analysis of revenue and employment data in the manufacturing industry shows that the lack of expansion in the industry is a result of a retreat in production in the high-technology industries, particularly for export ... " according to a July 25 statement on the monetary committee's rate decision on real economic activity from the Bank of Israel.
The charts below compare the performance of Israeli companies that derive more than 70% of revenue from within Israel (the Israel Domestic Exposure Index/IDEI) and the performance of Israeli companies that derive more than 70% of revenue from outside Israel (the Israel Global Exposure Index/IGEI).
These are important tools 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 with trends in global trade. We refer to the BlueStar Israel Global Total Investable Market Index (the BIGI-TIM), as opposed to the BIGI, as the benchmark for the full Israeli equity universe here.
It appears that the IDEI experiences periods of extreme out- 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 information technology, materials and pharmaceutical companies 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.
Last month, we wrote that 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. As a starting point for this analysis, we provide the quote from the Bank of Israel, above, and the chart below and to the left which tracks the relative performance of the IDEI over the IGEI along with some trend lines and moving averages.
From a quick look at this chart, we observe that room and momentum exists for the IDEI to continue out-performing the IGEI over the next few months.
Key components of the TA-BIGITec index that reported earnings recently include Amdocs, CheckPoint Software Technologies, Mellanox Technologies, Mobileye, NICE Systems and Wix.com.
1. Amdocs (DOX - Get Report)
The company's stock price had a muted reaction to its strong fiscal third-quarter earnings expectations. However, in the days after announcing earnings, shares have risen steadily and are up about 8% this year.
Some positive developments for the company were the announcement of dividend distributions, the continuation of its stock buyback program and the redemption of convertible senior debt on the first day this month, which, though the amount of principal being redeemed was small, was taken as a positive signal by investors.
2. CheckPoint Software Technologies (CHKP - Get Report)
Shares of the largest Israeli cybersecurity company are down about 10% since reporting earnings last month. Although second-quarter 2016 were strong, the company's management pointed to softer-than-expected guidance for the coming quarter in addition to a decision to defer recognition of some revenue.
3. Mellanox Technologies (MLNX - Get Report)
Shares of Mellanox are down about 15% since announcing earnings last month, despite beating Wall Street's earnings forecasts. Shares of the provider of data center connectivity solutions are still up about 7% for the year, however.
Although demand for Mellanox's products remains strong, migration to its newest products lines seems to be taking a bit longer than investors hoped.
4. Mobileye (MBLY)
Shares of Mobileye dropped about 10% the day that it reported second-quarter earnings, despite posting strong growth in earnings, revenue and revenue backlog. Shares of the autonomous driver assistance company dropped mainly due to its announcement that it will no longer count Tesla Motors among its large customer base.
Shares have since recovered by about 5%.
5. NICE Systems (NICE - Get Report)
This company's stock price rose as much as 7% in the wake of its second-quarter earnings announcement. NICE Systems beat analyst earnings expectations and also reported solid results for its data analytics segment, which is regarded by investors as a key area for the company's growth.
6. Wix.com (WIX - Get Report)
Shares of the do-it-yourself website development company jumped close to 20% after reporting record second-quarter earnings. Additionally, the company announced that its fully automated website development tool will be rolled out sooner than previously expected.
The bottom line is that BlueStar's outlook for Israeli global equities has changed from cautiously bullish to neutral after last month's rally, though the outlook for Israeli global tech companies continues to be relatively stronger. As of this month, markets are still digesting the impact of the Brexit on the Israeli economy and global trade, the potential for the Federal Reserve to raise rates next month, the second-quarter corporate earnings season, and the potential impact of the U.S. presidential election on the global economy.
Despite U.S. equity markets breaking out to new all-time highs in July and this month, other developed markets including Israel merely bounced off of post-Brexit oversold levels. At the same time, there is nothing overtly bearish in the economy or in the technical patterns of Israeli equity indexes, which leads us to our neutral outlook for Israeli global equities.
Highlights of our technical analysis of the BIGI and TA-BIGITech is presented below, and the full set of our analysis is available here.
Broad Israeli Stock Market Technical Analysis: BIGI®
Israeli Tech Market Technical Analysis: TA-BIGITech®