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Anticipating the US economic slowdown will continue to burden international markets, Merrill Lynch on Monday recommended that investors "park their money in Israel" by year-end to protect themselves from what is expected to be another round of emerging-market volatility.
Israel, the firm's analysts noted, tended to underperform emerging markets during an uptick in economic growth but outperform in times of economic sluggishness.
Investing in Israel, Merrill believes, will yield profits between now and the end of 2006, as well as provide somewhat of a shield from any emerging-market volatility. It cautioned, however, that because Israel was an open, export-oriented economy, it could not escape lower US growth entirely.
"From 2007, investors should go domestic and look for names that benefit from increased domestic demand and which are less exposed to the US. Consumer spending is the name of the game," analysts at the world's largest brokerage told clients.
"Those companies that we believe will benefit from stronger consumer trends and looser monetary policy in Israel, as well as their limited exposure to the global economy, include Bezeq, Partner and Bank Hapoalim," Merrill said.
Although the firm thinks the retail chains should be prime candidates to benefit from a stronger consumer, it said their valuations were still too high, with both Blue Square and Supersol trading at a price-to-earnings ratio of 17.5 times consensus analyst estimates for 2007.
Also on Merrill's recommended list is Israel Chemicals, even though the firm expects that the strong shekel and higher transportation costs could pressure margins.
Meanwhile, the broker noted, Ormat's fundamentals remained intact and much of the pressure likely was off the company with oil prices looking to have stabilized. It recommended increasing positions in the company.
But Merrill is especially bullish on the country's real estate sector, despite it being highly illiquid.
"We believe investors could do worse than invest in actual bricks and mortar," the firm said, noting its strong support for the fundamentals of the sector.
"We think the macroeconomic environment can only support its growth. Lower interest rates, stronger consumer spending and, most of all, the tight housing supply should boost the sector, especially on the residential side."
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