2011 brings promise to stocks with high-dividend yields

The Bank of Israel may find it difficult to increase interest rates on concern that it might strengthen the shekel further, thus accelerating inflation.

Money 311 (photo credit: Bloomberg)
Money 311
(photo credit: Bloomberg)
The year 2010 was an excellent one for the local stock market and despite slight fears, 2011 seems to bring with it an overall positive trend.
We believe that the local economy will continue to expand, but at a slower pace of only 3.5 percent in 2011 compared to 4.5% in 2010. The main reason for slower growth is the expectation of a decline in Israeli exports to Europe and the expected cooling down of the Asian economies.
We predict that inflation in 2011 will amount to 2.5%, above mid-range of the official target of 1% to 3%. The consumer price index will be influenced by a rise in the prices of agricultural products abroad, commodities and energy.
The Bank of Israel may find it difficult to increase interest rates on concern that it might strengthen the shekel further, thus accelerating inflation. We predict that the central bank will increase rates gradually, primarily in the first half of the year, to some 3%.
The inclusion of Israel in the lucrative club of the OECD is expected to lead to an improvement in the country’s debt rating.
When compared to other developing economies with their ballooning debt deficits and unstable financial systems, Israel’s positive position is further strengthened.
Foreign investors returning to the Israeli market will be exposed to a stable economy, which is priced relatively cheaply. Overseas investors will first invest in state bonds and Makam (one year notes issued by the Bank of Israel) and will gradually move to corporate bonds and stocks of companies in the banking and telecommunication sectors.
In the foreign currency market, pressures towards an appreciation of the shekel may intensify. The central bank has already purchased over $40 billion since March 2008, and this trend will continue. Ultimately, we believe that the Finance Ministry will be forced to intervene as well as to divert foreign currency away from the local market.
The most interesting market this year will continue to be the housing market. We believe that prices will increase slightly before the trend will reverse and prices will start declining. As interest rates are expected to rise, the number of investors buying properties will decline. Recent government initiatives will further encourage investors to sell properties. This, together with rising supplies and housing starts, will further contribute to falling prices. We believe that the first signs of the change in the housing market will be seen in the third quarter of 2011.
In the new year investors will focus on large liquid companies that have the potential to become more efficient and improve bottom lines. Portfolio mangers are also expected to pay greater attention to stocks with high dividend yields. After several years of restructuring and a forecast decline in corporate tax, a larger number of companies is expected to distribute dividends.
So, for example, the local banking sector is forecast to pay dividends at an average of some 4.5%, representing almost half of the overall expected capital gain.
Media and communication companies are expected to distribute dividends of 5% to 10% and some trade and property firms are predicted to distribute dividends of over 10%.
The banking sector, which yielded only 6.5% in 2010 in comparison to the 16% yielded by the TA-100 index, is expected to perform better in 2011. Rising interest rates and higher inflation expectations will improve credit ratios. The strengthening business sector will translate into an overall decline in doubtful debt.
In the debt market, we believe that the shortage of supply of state bonds will continue. The government is expected, however, to return to issuing more bonds in the second half of the year as tax revenues are believed to be lower than the official forecast. Investors are expected to reduce their holdings in state bonds and move instead to short corporate bonds, which offer higher yields.
Yaniv Hevron is the head of the macro-economics and strategy division at investment house Excellence Nessuah.