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BlueStar Israel Equity Update Fourth Quarter 2013

Q3 2013 in Review & Q4 2013 Outlook

What’s Inside  All major global developed and emerging m arket equity benchmarks rose strongly in Q3 2013 despite periods of increased geopolitical- and macroeconomic-related volatility.

 The BlueStar Israel Global Index rose 7.9% in Q3 2013 while the TA-100 and MSCI Israel 1. The indices were up 10.0% and 2.5%, respectively. BlueStar  The rally in Israeli equities was broad based and in each of the three largest sectors: Israel Global Information Technology, Financials and Health Care. Each of these sectors rose strongly during the quarter indicating strength in the domestic economy and improving conditions in the Index in Q1 economies of Israel’s largest trading partners. 2013  The Israeli budget government deficit is shrinking faster than expected, bringing on the prospect of lower taxes and higher government spending in 2014. The unemployment rate in 2-5. About the Israel dropped to its lowest level in 20 years, while the labor force participation rate is on the rise. BlueStar Israel  Mellanox Technologies has delisted its shares from the TASE and Opko Health, through a Global Index merger with Prolor Biotech, has become one of the largest companies on the TASE. and  There were a few large IPOs by Israeli companies during Q3 2013 and there is a strong Risk/Return pipeline of companies coming to market in Q4 2013 and early 2014, including the do-it-yourself Data website designer Wix.

 While the macro economic fundamentals in the Israeli economy remain very strong, the U.S. 6-7 government is in the midst of a shut-down and is two weeks away from a technical default on . Technical its debt. The European economic outlook remains weak but improving. Analysis The U.S. and France threatened the Assad regime in Syria after it used chemical weapons against its own citizens; the Iranians are coaxing world powers to the negotiating table. 8. Israeli Sector BIGI Performance Highlights (BlueStar Israel Global Index, Jan 2010- Sept 2013) 160 9. Capital 150 Markets 140 130 120 10. Israeli S&P 500 110 Economic BIGI 100 Review 90

11. Geopolitical 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Environment 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013 2013 2013 1 © 2013 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security About the BlueStar Israel Global Index

The BlueStar Israel Global Index (’BIGI’) provides a benchmark for investors to track the broadest and deepest universe of Israeli public companies. The index is constructed using BlueStar Indexes’ unique methodology and proprietary database of Israeli and Israel-linked companies. BIGI includes the largest and most liquid companies as well as mid and small cap companies that display sufficient liquidity for global investors. The index methodology allows for the inclusion of Israeli companies listed on the Tel Aviv Stock Exchange as well as other exchanges such as the London Stock Exchange, New York Stock Exchange, and NASDAQ. The BlueStar Israel Global Index has been created to provide investors with an investable product allowing them to quickly take advantage of both event-driven news and long-term economic trends as the economy and companies of Israel continue to evolve.

Comparative Sector Weights Comparative Risk MSCI - FTSE YTD Inception Sector BIGI TA-25 TA-100 1yr. 3yrs. 5yrs. 10yrs. 15yrs. EIS Israel 9/30/13 1 Information Technology 30.7% 7.5% 4.3% 5.5% 8.8% ACWI 10.50% 9.27% 14.69% 20.23% 16.67% 16.69% 15.61% Health Care 25.3% 22.6% 47.1% 18.4% 21.8% EAFE 14.04% 12.12% 17.31% 22.17% 18.36% 17.83% 16.91% Financials 19.2% 35.1% 23.8% 33.7% 32.5% MSCI EM 12.23% 11.77% 19.64% 26.35% 23.99% 23.76% 23.77% Energy 6.9% 4.9% 4.5% 15.1% 11.7% S&P 500 9.46% 9.04% 12.41% 18.08% 14.69% 15.69% 14.96% Materials 5.7% 10.8% 7.2% 10.4% 8.1% MSCI 8.62% 10.12% 18.79% 21.02% 18.89% 24.28% 23.94% Telecom Services 4.0% 8.5% 6.9% 11.3% 7.8% Israel Industrials 3.2% 5.5% 3.2% 2.9% 4.9% TA-100 12.41% 11.35% 18.41% 24.45% 21.83% 24.56% 24.52% Consumer Staples 2.2% 4.4% 2.5% 2.7% 3.3% TA-25 14.52% 13.02% 19.09% 24.47% 21.96% 24.77% 24.57% Consumer Discretionary 2.2% 0.7% 0.5% 0.0% 1.0% BlueStar 8.57% 7.68% 17.98% 23.03% 20.33% - - Utilities 0.5% 0.0% 0.0% 0.0% 0.0% Source: BlueStar Global Investors LLC *Annualized Sept 30, 2013 Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Sept 30, 2013 Long- Term Returns Five Year Correlations

YTD MSCI 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1 ACWI MSCI EM EAFE S&P 500 TA-100 TA-25 9/30/13 Israel ACWI 1.00 ACWI 14.92% 18.37% 10.81% 8.30% 8.41% 5.94% 7.90% MSCI EM 0.93 1.00 EAFE 16.59% 24.29% 8.97% 6.85% 8.50% 5.89% 7.00% MSCI EM -4.05% 1.33% 0.00% 7.56% 13.16% 12.32% 8.24% EAFE 0.98 0.91 1.00 S&P 500 19.79% 19.34% 16.27% 10.02% 7.57% 5.33% 8.81% S&P 500 0.97 0.85 0.91 1.00 MSCI MSCI 5.24% 1.20% -8.46% -1.30% 6.60% 6.98% 5.33% 0.71 0.76 0.67 0.65 1.00 Israel Israel TA-100 15.24% 20.54% 1.81% 6.64% 12.78% 10.44% 7.57% TA-100 0.84 0.86 0.80 0.79 0.85 1.00

TA-25 12.90% 18.34% 2.47% 6.71% 14.43% 11.08% 7.87% TA-25 0.85 0.87 0.82 0.81 0.85 0.99 1.00

BlueStar 15.65% 22.09% 2.97% 9.07% 14.09% - - BlueStar 0.86 0.87 0.83 0.81 0.87 0.98 0.97

*Annualized Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Source: BlueStar Global Investors LLC Sept 30, 2013 Sept 30, 2013

Index Weight as Index Weight Company Name Ticker Exchange of Sept. 30, 2013 Company Name Ticker Exchange as of Sept. 30, 2013 1 Teva Pharmaceutical Industries TEVA TASE 11.42% 48 Opko Health Inc OPK NYSE 0.51% 2 Perrigo Co PRGO NYSE 8.39% 49 Rami Levi Chain Stores RMLI TASE 0.49% 3 Check Point Software CHKP NASDAQ 7.15% 50 Aloni Hetz Properties ALHE TASE 0.48% 4 Amdocs Ltd DOX NYSE 4.84% 51 Ratio Oil Exploration L.P. RATIp TASE 0.48% 5 Bank Hapoalim BM Reg POLI TASE 4.09% 52 Orbotech Ltd (US) ORBK NASDAQ 0.48% 6 Bank Leumi Le-Israel BM LUMI TASE 3.92% 53 888 Holdings Plc 888 LN 0.48% 7 VeriFone Systems Inc PAY NYSE 3.08% 54 Kamada KMDA TASE 0.47% 8 Israel Chemical Corp ICL TASE 2.97% 55 Delek Automotive Systems Ltd DLEA TASE 0.47% 9 BEZEQ ISRAELI TELECOM CORP BEZQ TASE 2.82% 56 ALLOT COMMUNICATIONS LTD ALLT NASDAQ 0.44% 10 Stratasys Ltd SSYS NASDAQ 2.59% 57 Ormat Industries ORMT TASE 0.43% 11 Nice Systems Ltd NICE TASE 2.06% 58 MELISRON Ltd. MLSR TASE 0.43% 12 VERINT SYSTEMS VRNT NASDAQ 1.65% 59 Clal Industries CII TASE 0.43% 13 Israel Corp ILCO TASE 1.55% 60 Shufersal Ltd. SAE TASE 0.42% 14 Playtech PTEC LN 1.41% 61 Ceva Inc CEVA NASDAQ 0.41% 15 MELLANOX TECH MLNX NASDAQ 1.28% 62 Protalix Biotherapeutics Inc PLX NYSE 0.41% 16 Israel Discount Bank 0.1 DSCT TASE 1.24% 63 NITSBA Hldgs (1995) Ltd NTBA TASE 0.40% 17 Mizrahi Tefahot Bank Ltd MZTF TASE 1.22% 64 Jerusalem Oil Exploration JOEL5 TASE 0.40% 18 Isramco Negev 2 LP ISRAp TASE 1.17% 65 Audiocodes Ltd AUDC NASDAQ 0.40% 19 Delek Group Ltd DLEKG TASE 1.13% 66 Syneron Medical Ltd ELOS NASDAQ 0.38% 20 Elbit Systems Ltd ESLT TASE 1.09% 67 Babylon Ltd. BBYL TASE 0.38% 21 Taro Pharmaceutical Industries TARO NYSE 1.08% 68 Menorah Insurance Co Ltd 1 MMHD TASE 0.38% 22 Gazit Globe 1982 Ltd GZT TASE 0.96% 69 Ituran Location & Control Ltd ITRN TASE 0.38% 23 SodaStream International Ltd SODA NASDAQ 0.90% 70 Evogene Ltd. EVGN TASE 0.37% 24 Azrieli Group AZRG TASE 0.87% 71 Oil Refineries Ltd ORL TASE 0.37% 25 First Intl Bank of Israel FTIN TASE 0.84% 72 Discount Investment Corp DISI TASE 0.37% 26 Avner Oil & Gas Ltd LP AVNRp TASE 0.82% 73 AMOT Investment Ltd AMOT TASE 0.35% 27 Delek US Holdings DK NYSE 0.77% 28 Imperva Inc IMPV NYSE 0.75% 74 Africa Israel Properties AFPR TASE 0.35% 29 Paz Oil Company Ltd PZOL TASE 0.71% 75 Cinema City International NV CCI Warsaw 0.35% 30 Osem Investment OSEM TASE 0.69% 76 Mazor Robotics Ltd. MZOR TASE 0.34% 31 Harel Insurance Inv Ltd 1 HARL TASE 0.66% 77 PLURISTEM THERAP PSTI NASDAQ 0.34% 32 Ezchip Semiconduct EZCH TASE 0.65% 78 Jerusalem Economic Corp (ECJ) ECJM TASE 0.34% 33 Frutarom FRUT TASE 0.64% 79 Israel Phoenix Assurance 1 PHOE1 TASE 0.33% 34 Cellcom Israel Ltd. CEL TASE 0.63% 80 Koor Industries KOR TASE 0.33% 35 Strauss Group STRS TASE 0.62% 81 Bayside LandCorp 1 BYSD TASE 0.31% 36 Partner Communications Co Ltd PTNR TASE 0.60% 82 Photomedex Inc PHMD NASDAQ 0.30% 37 Migdal Insurance Hdlgs MGDL TASE 0.59% 83 Silicom Limited SILC NASDAQ 0.30% 38 Delek Drilling LP DEDRp TASE 0.57% 84 Alon Usa Energy ALJ NYSE 0.29% 39 Radware Ltd RDWR NASDAQ 0.57% 85 Nova Measuring Instruments Ltd NVMI TASE 0.29% 40 LivePerson Inc LPSN NASDAQ 0.57% 86 FIBI Hldgs FIBI TASE 0.28% 41 Caesar Stone Sdot Yam Ltd CSTE NASDAQ 0.55% 87 Ceragon Networks [US Listing] CRNT NASDAQ 0.27% 42 Given Imaging Ltd GIVN NASDAQ 0.54% 88 Gilat Satellite Networks GILT TASE 0.26% 43 Delek Energy Systems Ltd DLEN TASE 0.54% 89 DSP Group DSPG NASDAQ 0.24% 44 Ormat Technologies ORA NYSE 0.54% 90 Africa-Israel Inv Ltd AFIL01 TASE 0.23% 45 Shikun & Binui Ltd. SKBN TASE 0.53% 91 Clicksoftware Technologies Ltd CKSW NASDAQ 0.23% 46 Clal Insurance Enterprises Hldgs CLIS TASE 0.53% 92 Brainsway Ltd. BRIN TASE 0.23% 47 Compugen Ltd CGEN NASDAQ 0.52% 93 Givot Olam Oil Exploration L.P. GIVOp TASE 0.08%

Plus 500 (PLUS: LN AIM) The provider of multi-asset trading platforms provides customers access to UK, U.S., European, and Asian equity, foreign exchange, commodity and index exchanges. The company held its IPO at a $200 million company valuation.

Alcobra Pharma (ADHD: NASDAQ) Develops products for the treatment of Central Nervous System Disorders, especially Attention Deficit Disorder. The company’s market cap was $207 million as of October 8, 2013.

Wix (WIX: NYSE) Plans to raise $100 million in its IPO on the NYSE and filed its prospectus with U.S. regulators in late September. The company provides website construction and management services.

Tnuva Considering an IPO in 2014 on the TASE. The company would seek to offer its shares at a company valuation of NIS 8 billion, which is nearly $2.25 billion. Tnuva was a pioneer in Israel’s dairy product manufacturing and marketing industry. The company is controlled by private equity fund Apax Partners.

Matomy Media Group Planning an IPO on the London Stock Exchange in early 2014 and is seeking a company valuation of nearly $500 million. Matomy is a digital advertising technology company.

Outbrain Planning a 2014 IPO on a U.S. stock exchange at a company valuation of $1 billion. Outbrain helps web publishers serve suggested stories and ads within or below the content of a website.

Delek Energy Planning to dual list shares on a New York exchange. Delek Energy, which is a subsidiary of Delek Group, already has its shares traded on the TASE.

Varonis Varonis is planning to raise nearly $150 million at a company valuation of $500 million in late 2013 or early 2014 on a New York Exchange. Varonis is a data security company.

BIGI Internal Characteristics Attribution

Currency Attribution Exchange-Related Attribution

Local Attribution of Total Index Attribution of Currency Currency Weight Listed on Total Index Weight Category to BIGI Performance Performance Local Exchange(s) as of Sept 30 2013 Performance (Q3 vs USD (Q3 to BIGI Sept 30, 2013 2013) 2013) Performance Dual-Listed 33.70% 2.25% Israel – New Israeli Constituents Shekel 73.37% 2.24% 1.64% Non-TASE (TASE) 37.45% 2.96% Constituents US - US Dollar (NYSE, NASDAQ, 24.40% 0.00% 0.00% Non-TASE AMEX) Technology 16.82% 1.70% Constituents UK – GB Pound 1.89% 5.96% 0.11% (London)

Poland – Polish Zolty 0.35% 5.60% 0.02% (Warsaw)

Total Direct Effect of Currency Fluctuation - - 1.78% on BIGI Price Level

BlueStar Israel Global Index Constituent Attribution vs Peers

BIGI Weight BIGI Weight Q3 2013 Q3 2013 Positive Relative to MSCI Relative to MSCI Negative Company Name Relative Weight Company Name Israel Capped Israel Capped Relative Weight Attribution Index Index Attribution

VeriFone Systems Inc 3.08% 1.11% BEZEQ ISRAELI TELECOM -2.51% -0.95%

Check Point Software 7.15% 0.99% Bank Hapoalim BM Reg -5.93% -0.69%

Israel Chemical Corp -3.81% 0.55% Bank Leumi Le-Israel BM -4.67% -0.55%

Stratasys Inc 2.59% 0.54% Delek Group Ltd -1.27% -0.33%

Compugen Ltd 0.52% 0.46% Elbit Systems Ltd -1.17% -0.32%

Playtech 1.41% 0.43% Nice Systems Ltd -2.26% -0.30%

Taro Pharmaceutical 1.08% 0.39% MELLANOX TECH 1.28% -0.30%

Caesar Stone Sdot Yam Ltd 0.55% 0.37% Delek US Holdings 0.77% -0.21%

Teva Pharmaceutical -11.12% 0.28% Partner Com -0.73% -0.19%

Audiocodes Ltd 0.40% 0.23% Mizrahi Tefahot Bank -1.38% -0.13%

The BlueStar Israel Global Index (BIGI) has been trending well from a technical point of view and is supportive of our fundamentally bullish view on Israeli Global Equities.

Israeli Global Equities (BIGI) Three-Year Performance Chart Resistance was broken in June/July 2013, but the index subsequently dipped below this line upon the rumor that the U.S. would conduct military strikes in Syria. As with most geopolitical-driven pull backs, BIGI recovered from this pull back quickly and made new two-year highs in September. Short- Term Target: 255-260

Short Term Support: 235

Source: BlueStar Global Investors LLC (January 1, 2010- Sept 30, 2013)

Long-Term Target: 310

Israeli Global Equities (BIGI) Six-Year Performance Chart Mid-Term Target: 270

Mid-Term Support: 225

Long-Term Support: 195

The 2008/2009 lows connect with the lows put in during mid-2012 to form a strong channel of support, guiding BIGI higher over the past year.

Source: BlueStar Global Investors LLC (January 1, 2007- Sept, 30 2013) Technical Analysis: Top Ten Holdings (Weights/Charts as of Sept 30, 2013)

TEVA (11.42% of BIGI)

We closely follow chart patterns of the largest BIGI constituents. These chart patterns are revealing as to the direction of the broader index as an index is simply a sum of its parts. We provide charts for the five highest-weighted companies in the BlueStar Israel Global Index. While the chart for Teva is not particularly bullish, though nearing support, other Israeli Global Equity leaders in the Financial, Information Technology, and Health Care sectors show more upside potential.

Perrigo Co. (8.39%) Check Point Software (7.15%)

50-Day Simple Moving Average Amdocs (4.84%) 200-Day Simple Moving Average Bank Hapoalim (4.09%)

Sector Q3 2013 Q2 2013 Q1 2013 Q4 2012 As defined by BlueStar Performance Performance Performance Performance Indexes Information Technology 3.08% 0.10% 0.95% 1.54% Financials 2.06% -0.13% 1.13% 4.45% Health Care 1.14% -0.09% 2.08% -1.97% Telecommunication Services 1.11% -0.07% 0.41% -0.40% Industrials 0.62% -0.03% 0.55% 0.11% Energy 0.41% -0.85% 1.23% 2.15% Consumer Staples 0.10% 0.25% 0.20% 0.12% Consumer Discretionary -0.10% 0.62% 0.38% 0.04% Utilities -0.16% 0.02% -0.05% -0.30% Materials -0.35% -1.47% 0.73% -0.16% Information Technology

Of the 24 Information Technology sector components in the BlueStar Israel Global Index, nine had double digit gains during the third quarter of 2013 and six rose by 20 percent or more. Additionally, the rally in Israeli Global Information Technology stocks was broad based across subsectors: software, semiconductors, technology and internet services, and hardware and machinery. Standout performers during the quarter included AudioCodes (AUDC:TASE, NASDAQ), Babylon (BBYL:TASE), VeriFone (PAY:NYSE), Ceragon Networks (CRNT:NASDAQ), Playtech (PTEC:LN), Stratasys (SSYS:NASDAQ), and Checkpoint (CHKP:NASDAQ), which rose 58%, 41%, 36%, 34%, 31%, 21%, and 14% respectively. In line with other global technology indexes (such as the NASDAQ-100 index), Israeli Global Information Technology stocks outperformed other equities sectors during the quarter after many technology companies reported improving earnings, increasing orders backlog, decreased payment time from customers, and a generally more upbeat outlook for the fourth quarter of 2013 and for 2014.

Financials

Though Financials stocks were down in August, they rose strongly in both July and September. For as long as BlueStar Indexes has been conducting our monthly and quarterly analysis, we have not seen sharp rises in the BlueStar Israel Global Index without the participation of the Financials sector. Additionally, we have noticed that Financials stocks tend to rise most strongly during the beginning of a prolonged uptrend, while Information Technology and Consumer Stocks tend to take leadership roles later on in the market cycle. The Financials companies play an especially important role in the Israeli economy and the Financials stocks can be an especially important indicator for the Israeli Global Equity market. The Financials sector includes banks and financial services companies, as well as real estate and holding companies. Holding companies in Israel are still able to hold both financial and non-financial operating assets. Because of that, the holding companies are largely exposed to trends in all areas of the economy, including: consumer, housing and business credit, consumer goods and services, energy, construction, and health care. Also, the strength of the Shekel has decreased the credit risk and increased the credit worthiness of Israeli businesses and government. This created an environment more conducive to lending and economic activity over the past six to nine months than we have seen in quite some time. Finally, all of Israel’s major banking institutions are very well capitalized. They have core capital adequacy ratios well above what is required by the Bank of Israel and are ahead of schedule in meeting the requirements set by the Basel III accord. Materials

Materials stocks experienced a big setback during the third quarter as reports of decreased outlooks for the demand for potash and a changing competitive landscape in the global fertilizer and potash markets weighed heavily on Israel Chemicals (ICL:TASE) and its parent company Israel Corp (ILCO:TASE).

A key source of Israel’s economic resiliency and growth is its ability to tap international markets and forge economic and security agreements with foreign governments and agencies. In the third quarter of 2013, several such relationships developed, including:

. Chinese officials will seriously consider a free trade agreement with Israel . Philips Health care announced it will developed an R&D/incubator in Israel . Tel Aviv University will be opening an “Israel Studies and Research” center at Shanghai University . The World Bank invested $5 million in Israeli broadband company DiViNetworks . The Israel Export and International Cooperation Institute reduced its 2013 forecast for export growth from 3% to 0% . Israeli exports to Africa, excluding Egypt and Morocco, rose by 250% in the ten years from 2002 to 2012 . Israel’s plans to become a player in global energy markets continued to progress throughout the third quarter: . In addition to the natural gas found in the Leviathan field, there may also be 1.5 billion barrels of oil . A panel of judges will review the government’s decision on Israeli natural gas exports . Delek Group is planning to export gas via pipeline to Jordan, Turkey, Egypt and the Palestinian territories . Lebanese tenders for licenses in the country’s exclusive economic zone to drill for oil and gas are encroaching upon Israel’s exclusive economic zone and may prompt Israel to seek legal action Equity Market

International investors’ interest in TASE-listed shares rose in the third TASE Equity and Convertibles Market Vitals at Sept 30, 2013 quarter. Foreign investors bought a net $320 million in TASE-listed shares Number of Listed Daily Turnover in July after buying net a $970 million in the first six months of the year: Companies Market Cap (USD) (USD mm) compare the July monthly figure to the monthly average of $162 million 2013/2012 2013 YTD/2012 over the first half of 2013. 514/556 184.4 Billion 311/279 Average daily turnover of TASE-listed shares in 2013 surpassed that of 2012 Number of Public New Capital during the third quarter: low trading volume on the local exchange has Issues 2013 Raised (USD) been a major problem for the TASE and discourages investment in locally- YTD/2012 2013YTD/2012 listed shares. Additionally, new capital raised on the TASE has already 1.47 billion/1.06 67/66 surpassed the 2012 figure with three months still left in the year. billion

Lastly, U.S.-based Opko Health merged with Prolor Biotech and has opted to retain Prolor’s TASE share listing. Opko is now among the 25 largest companies traded on the TASE as measured by market capitalization. Though Mellanox Technologies delisted its shares, there is hope that the local exchange will be able to reverse the trend of net de-listings and declining trading volumes. Babylon plans to merge with ironSource which will dramatically increase its market capitalization and Tnuva is considering the largest TASE IPO in several years. For the first time in several years, the outlook for the future of the local exchange is brighter.

Credit Market

Israel Non-Government Bond Index The rising Shekel and relatively strong economic growth and low unemployment have (Jan 2010 – Sept 2013) reduced credit risk in Israeli debt markets. The effect of the regulatory changes regarding Israeli corporate pyramids, which has served to reduce the risk of holding some Israeli corporate debt, is becoming more clear.

Both Standard and Poor’s and Moody’s reaffirmed their high credit ratings on Israeli government foreign currency credit with stable outlooks during Q3 2013. The resulting lower yields in government debt has permeated throughout the broader corporate and consumer credit markets. Total outstanding debt of the business sector now stands at NIS 779 billion. Debt issued to the non-financial business sector in August was NIS 2.5 billion.

Israel GDP Growth Israel vs OECD Members Israel’s GDP Growth Factors

Economic activity continues to expand at a rate similar to 2011 and 2012 activity, excluding the effects of natural gas on GDP. Goods imports continued to rise during the third quarter while exports declined. The net exports segment of GDP is the main reason for projected stagnation in Israel’s GDP growth rate in 2013 as private consumption has been quite strong. Annualized first half 2013 GDP growth is estimated to be 4.9%, but the full year 2013 growth rate, including the production of natural gas, is expected to be 3.6%.

Fiscal Policy

The cumulative Israeli government budget deficit was NIS 7.5 billion Source: OECD in the first half of 2013, which was below the seasonal path for the * Estimates as of June 2013 target. The deficit in 2014 is expected now to be 3.0% of GDP. Because the budget deficit is coming in below expectations, the Finance Minister is beginning to explore tax reductions and the postponement of planned expenditure cuts in 2014. Shekel-Dollar

The unemployment rate fell to 6.1% in August, which is the lowest rate in nearly twenty years. The labor market participation rate rose, confirming that the unemployment rate decline is due to real job creation rather than a shrinking labor force.

Inflation and Monetary Policy

The Consumer Price Index declined over the twelve months ending August 2013 to 1.3%. The Bank of Israel expects the inflation rate in 2014 to be 1.9%, which is near the midpoint of the target rate.

The Bank of Israel lowered its policy benchmark rate for October 2013 from 1.25% to 1.00%, which is the lowest rate ever for Israel. Jan. 1, 2010 - Sept. 30, 2013 The decision was made in light of moderate inflation and inflation expectations, mild global economic growth, and to help ease the Shekel’s appreciation in order to support Israel’s export markets. Shekel-Euro New Israeli Shekel Performance

The Shekel began reversing its appreciation versus the Euro in Q3 2013 but continued to gain against the dollar. The Israeli government took advantage of the recent shekel appreciation in September when it hedged $75 million of its external debt position bringing the total hedged amount to $600 million or 10%.

The appreciation of the Shekel is widely attributed to the beginning of natural gas production in Israel, which has aided Israel’s current account and boosted the credit worthiness of the Israeli government. The Shekel appreciation is also enabling Israelis to import more goods while making Israeli goods less competitive in export markets. Jan. 1, 2010 - Sept. 30, 2013

The divergence between Israeli and U.S. equities over the past nine months or so represents the largest performance differential between the two markets in recent years, and we attribute this mostly to overblown fears of geopolitical risks in the local market. As we have seen repeatedly, investors in Israeli markets typically overreact to geopolitical risks and long-term investors are rewarded with strong outperformance once fear-based selling subsides. Opportunistic investors and traders who took advantage of the sell off in August caused by the threat of a U.S. strike on Syria by adding to their Israeli Global Equity exposure were rewarded when Israeli equities rebounded and rose strongly in September.

Global systemic risks remained heightened into the close of the third quarter and intensified in the beginning of the fourth quarter as the recovery in Europe remained slow and the U.S. government shut down with a debt-default still on the table. On the other hand, once-imminent geopolitical risks to global equity markets have been pushed forward: The U.S. and Russia have gotten the Assad regime to commit to giving up its chemical weapons stockpile and dialogue between Iran and the West over Iran’s nuclear enrichment program softened in late September and early October. There are no signs of substantial progress in peace negotiations between Israel and the Palestinians.

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