Bullish sentiment on TASE seen continuing

It seems now that only psychological fears can prevent the TASE from improving even further to reach yet new highs.

By YANIV HEVRON
October 20, 2010 22:35
2 minute read.
Trader watches the stocks

Trader watches the stocks 58. (photo credit: AP)

The Tel Aviv Stock Exchange continues rallying and the TA-100 index is currently only 3 percent from its all-time-high of 1,196 points.

It seems now that only psychological fears can prevent the TASE from improving even further to reach yet new highs.

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All other indicators, including high liquidity, P/E ratios, attractive prices and lack of other investment opportunities, support a further rise in the local bourse.

From a technical perspective, the TA-100 index is facing a resistance level at 1,170.

In recent months, Bank of Israel Governor Stanley Fischer has contributed to the overall confusion about future interest rates trend.

In the short term, the market will continue to be influenced by interest rate decisions. Fischer is facing a real dilemma as the rise in real estate prices and the sharp increase in inflation expectations contribute to the pressure to raise interest rates as soon as next month.

Moreover, strong economic indicators, including tax collection, declining unemployment, and continued improvement in foreign trade, further accelerate pressures to raise interest rates.

On the other hand, the Israeli rate is already relatively high when compared to most Western economies, and uncertainty concerning world currency wars is likely to influence Fischer to delay raising rates for at least another month.

It is estimated that the Bank of Israel has acquired some $1.5 billion this month, and it is clear that another rate hike would only increase the attractiveness of buying shekels by foreign players, forcing Fischer to accelerate foreign currency buying.

The September Consumer Price Index published on Friday rose by 0.3 percentage points, slightly above the expectations of analysts, who had forecasted a rise of only 0.2 percentage points. The increase was mainly attributed to a sharp rise (10%) in the price of fruits and vegetables.

We forecast now that the October CPI will rise by a similar 0.3 percentage points and that inflation will rise by an overall 2.5% in the coming 12 months.

The bonds market is expected to continue to rise and we recommend holding cash and long-term bonds, as we don’t forecast a rise in interest rates. When investing in inflation-linked bonds, we prefer short corporate bonds over long government bonds with a medium duration.

We believe that the risk premium of corporate bonds is reasonable and will decline in the future.

For those investing in bonds carrying variable interest, we prefer to focus on corporate bonds as they offer a premium over government bonds. We recommend keeping a balance between linked and unlinked assets, and if the interest rate gap between Israel and the rest of the world continues to widen we would recommend increasing the weight of unlinked bonds.

For those looking to invest abroad, we would recommend increasing exposure to developing markets in Asia and Brazil. We also believe that the craziness in the gold market will continue, and that low bonds yields and higher liquidity will fuel this trend and other investors will start buying the precious metal, pushing gold prices up even further.

Yaniv Hevron is the head of Macro-Economics and Strategy at Investment House Excellence Nessuah.


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