UBS, Citigroup take different views on Israel's outlook

Emerging-markets analysts at two major investment firms gave investors in Israel a mixed message this weekend, with Citigroup upgrading its view of the country and UBS downgrading.

By ROBERT DANIEL, MARKETWATCH
May 14, 2007 07:23
2 minute read.

MarketWatch: In-depth global business coverage Emerging-markets analysts at two major investment firms gave investors in Israel a mixed message this weekend, with Citigroup upgrading its view of the country and UBS downgrading. Citigroup's emerging-markets analysts, in what they called a surprising choice, upgraded Israel to "overweight" from "underweight," citing a domestic economy "in great shape," low interest rates and the strong shekel. The Tel Aviv Stock Exchange benchmark index is up nearly 20% this year, versus 7% for the region, the analysts said. "Valuations are still reasonable within an emerging-markets context," analysts Andrew Howell and Geoffrey Dennis wrote in a note on Friday, adding that growth in gross domestic product "of close to 5% for the fourth year in a row continues unabated amid buoyant business sentiment, high income growth and monetary easing." Looked at longer term, however, they said Israel is "the major laggard" of the Central and Eastern Europe, Middle East and Africa region: Since 2003, it's more than doubled in value, but that still ranks it the third-worst-performing emerging market, analysts Low inflation has enabled interest rates to drop, the Citi analysts noted, adding that "with the currency at its strongest level versus the dollar in seven years, there will be little appetite for monetary tightening at the central bank." In the past two weeks, Citi's emerging-markets analysts have downgraded South Africa to "underweight" from "neutral" and Turkey to "underweight" from "overweight." They remain "overweight" on Hungary and Egypt and "neutral" on Russia and Poland. Over at UBS, however, emerging-markets strategists Oussama Himani and Stephen Mo cut their rating on Israel to "underweight" from "neutral." "Israel has been one of the strongest performers within [global emerging markets] year to date, driven largely by the performance of a few stocks in" the materials and consumer-discretionary sectors, they wrote. "A large share of the market, including financials and pharmaceuticals, has underperformed. While valuations are not especially demanding relative to its history, they are at premium relative to [global emerging markets]. "We see limited further upside compared to other emerging markets, though the strong macro fundamentals are also likely to help keep the downside to the market limited." Among stock picks, the analysts said they now like cellular-service provider Cellcom more than Delek - with interests in real estate, fuel and other fields. "We see greater upside in Cellcom, which has underperformed Partner and is supported by strong earnings growth," they wrote. "Cellcom is also a business-turnaround story and currently enjoys a dividend yield that is higher than the local bond yield." The analysts also cut their rating on the Philippines to "underweight" and increased their suggested overweighting on Brazil. MarketWatch: In-depth global business coverage


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