Emerging markets continue to take a bruising just one month after reaching an alltime high, but Israel continues to garner praise as a bright spot in the gloom.
"The past month is starting to take on some of the characteristics of the 'great' emerging markets sell-offs of the past," Citigroup strategist Andrew Howell told clients over the weekend in a research report on the CEEMEA, or Central Eastern Europe Middle East and Africa.
Although he said it was not yet clear whether markets were still in a correction phase or whether the 2003-2006 bull market was over, Howell noted that the selling of the past month has been sharper than the losses seen from 1994-1995, though the sell-offs of 1997-1998 and 2000-2002 were far worse in both magnitude and duration.
So far, however, Howell said the damage to fundamentals looks modest in most markets and, despite expectations that markets will rebound later this year, he believes caution is warranted for now.
To ride out the storm, Howell recommended Israel as a "defensive haven," upgrading his weighting to "neutral" from "underweight" and adding Teva Pharmaceutical Industries Ltd., the world's largest generic drugmaker, to the firm's "Focus List."
"The market looks relatively inexpensive, offers an attractive dividend yield and has been considerably less volatile than the choppier environments in emerging Europe and South Africa," Howell said. "The global exposure of Teva and the Israeli technology stocks should provide a decent cushion in the near-term."
At the same time, Howell reiterated his "overweight" recommendation on Egypt but cut his rating on Turkey to "underweight" from "neutral."
Citigroup joins Deutsche Bank, which late last month called Israel a "safe haven" for those looking to invest in emerging markets, and HSBC Holdings, which last week also dubbed Tel Aviv a "defensive" market.
Israel's benchmark index, the TA-25, has declined about 10% over the past month.
"Israel is considered one of the stronger markets in the emerging markets group... [but] it does still belong to this group," chimed in Bank Hapoalim analyst Yaron Fridman. "This means that when foreigners take funds home, the local market suffers from funds leaving as well."
Despite the turmoil in global markets, Fridman reiterated his belief that the domestic economy still looks good and will support the equity markets in the long-term. In the nearterm, however, he said international market forces will be stronger than traditional economic forces, so that the risk level in the domestic equity market is very high, reducing its attractiveness in the next few weeks.