Bluestar Israel Equity Update Second Quarter 2014

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BlueStar Israel Equity Update Second Quarter 2014

Q1 2014 in Review & 2014 Outlook

What’s Inside

 All major global developed market equity benchmarks rose strongly in Q1 2014 after a strong finish to 2013. However, the first quarter was noticeably volatile with sharp 1. Israeli Global swings in most global equity benchmarks throughout the quarter. Equities in Q4  The BlueStar Israel Global Index rose 6.72% in Q1 2014 while the TA-100 rose 2013 5.64% and the BlueStar Israel Global Technology Index rose 5.78%

 The rally in Israeli Global Equities in the second half of 2013 was broad based across and within sectors. There was a different story in Q1 2014 as the rally in the major 2.-6. About the BIGI & Israel equity indexes was led by a few heavily-weighted stocks: Teva Pharmaceuticals BIGTech Indexes, accounted for a majority of the BlueStar Israel Global Index’s rise in the first quarter Rebalance Review, signaling weaker internals for the broader Israeli equity market.

and Risk/Return  The Israeli government budget surplus remains in line with the seasonal path Data required to remain within the debt ceiling target for 2014

 The revival in trading volume and capital raises on the TASE which began in the second half of 2013 continued into the first quarter of 2014 as regulators continued to 7-9. Technical Analysis explore ways to steepen the local exchange’s trajectory in those categories

The Bank of Israel lowered its policy interest rate to 75 bps in the first quarter of 2014, signaling that it may continue to prolong its expansionary policy even if the Federal 10. Israeli Sector Reserve begins to tighten sooner than expected. Spotlight The Shekel weakened slightly against the U.S. Dollar and the Euro during the first quarter.

11. Israeli Capital Markets Update BIGI Performance (BlueStar Israel Global Index, Jan. 2010- Mar. 2014) 190 12. Israeli Economic Review & Outlook 170

150

13. Geopolitical 130 TA-100 Environment S&P 500 110 BIGI

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 Long- Term Returns*

MSCI - FTSE YTD Sector BIGI TA-25 TA-100 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1 EIS Israel 3/31/14 Information Technology 30.6% 7.0% 3.6% 5.0% 8.5% ACWI 1.21% 17.19% 9.14% 18.43% 7.53% 4.91% 8.13% Health Care 30.0% 25.1% 55.2% 23.0% 25.1% EAFE 0.77% 18.04% 7.72% 16.56% 7.01% 4.91% 7.15% Financials 18.3% 35.1% 20.3% 33.3% 32.1% MSCI EM -0.37% -0.85% -2.54% 14.83% 10.45% 10.33% 8.11% Materials 5.4% 10.6% 6.8% 9.2% 7.5% Energy 5.1% 4.9% 3.8% 14.0% 11.3% S&P 500 1.81% 21.86% 14.66% 21.16% 7.42% 4.46% 9.20% Telecom Services 3.4% 8.2% 5.4% 10.2% 7.3% MSCI Israel 18.71% 24.02% -1.79% 7.25% 7.00% 7.24% 6.35% Industrials 2.7% 4.5% 2.6% 2.8% 4.4% TA-100 5.64% 21.43% 1.95% 18.24% 11.39% 10.06% 8.02% Consumer Discretionary 2.4% 0.6% 0.3% 0.0% 0.9% TA-25 4.90% 17.97% 1.91% 18.23% 13.28% 10.45% 8.25% Consumer Staples 1.7% 4.0% 2.0% 2.5% 3.0% Utilities 0.5% 0.0% 0.0% 0.0% 0.0% BlueStar 6.72% 26.78% 4.54% 20.27% 12.20% - -

Source: BlueStar Global Investors LLC *Annualized Mar. 31, 2014 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Mar. 31, 2014 Comparative Risk (Standard Deviation of Returns)* Five Year Correlations YTD MSCI 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1 ACWI MSCI EM EAFE S&P 500 TA-100 TA-25 3/31/14 Israel ACWI 12.73% 10.96% 14.52% 16.22% 16.63% 16.50% 15.50% ACWI 1.00 EAFE 13.91% 13.49% 16.75% 18.47% 18.28% 17.65% 16.79% MSCI EM 0.92 1.00 MSCI EM 16.01% 14.19% 19.49% 21.63% 23.96% 23.47% 23.58% EAFE 0.98 0.88 1.00 S&P 500 11.83% 9.96% 12.47% 13.99% 14.71% 15.48% 14.87% S&P 500 0.96 0.81 0.89 1.00 MSCI Israel 11.69% 12.30% 19.58% 19.29% 18.93% 24.18% 23.78% MSCI Israel 0.69 0.71 0.64 0.66 1.00 TA-100 11.25% 12.07% 17.07% 19.87% 21.60% 24.07% 24.27% TA-100 0.82 0.82 0.79 0.75 0.86 1.00 TA-25 13.69% 14.41% 17.75% 20.35% 21.83% 24.29% 24.34% TA-25 0.81 0.83 0.78 0.75 0.84 0.99 1.00 BlueStar 9.07% 9.61% 16.94% 19.44% 19.95% - - BlueStar 0.85 0.83 0.82 0.79 0.87 0.98 0.95

*Annualized 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Mar. 31, 2014 Source: BlueStar Global Investors LLC Mar. 31, 2014

2 © 2014 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security About the BlueStar Israel Global Technology Index (BIGITech) The BlueStar Israel Global Technology Index provides a benchmark for investors to track Israeli and Israel-linked technology companies trading worldwide. The index is constructed using BlueStar Indexes’ unique methodology and proprietary database of Israeli and Israel-linked companies. BIGITech is a modified market capitalization weighted index, capping the top-weighted constituents at 10%. It includes the largest and most liquid technology companies, as well as mid and small cap companies that display sufficient liquidity for global investors. The methodology allows for the inclusion of Israeli companies listed on the Tel Aviv Stock Exchange and other major exchanges such as the London Stock Exchange, New York Stock Exchange, and NASDAQ. Furthermore the methodology provides for the inclusion of companies that develop, manufacture, and/or deliver innovative technologies in a wide range of tech sectors, including Bio-Tech, Agri-Tech, Defense-Tech, Clean-Tech as well as Info-tech. The BIGITech Index provides investors with an investable benchmark that allows them to quickly take advantage of event-driven news, industry trends, market/industry cycles, as well as the potential for capital appreciation driven by Israeli technological innovation. GICS Industry Breakdown Index Internals Data

Industry Weight Preliminary Index Statistics Software 30.44% No. of Securities 49 I.T. Services 20.20% Semiconductors 9.77% Currency USD Computers & Peripherals 7.92% Max. Security Weighting 10.23% Communications Equipment 7.21% Biotechnology 4.46% Concentration Ratio 59.90% Health Care Equipment $ Supplies 4.14% AeroSpace & Defense 3.01% Annualized 5 Year Performance 24.41% Internet Software & Services 2.92% Dividend Yield n/a Diversified Financial Servcies 1.59% Electronic Equipment & Components 1.54% Mar. 31, 2014 Utilities 1.47% Life Sciences Tools & Services 1.37% Primary Listing of Constituents Electrical Equipment 1.27% New York (NYSE/NQ) US Dollar 70.26% Telecommunication Services 1.05% Hotels, Restaurants & Leisure 1.02% Tel Aviv (TASE) Israeli Shekel 23.02% Pharmaceuticals 0.63% Mar. 31, 2014 London (LSE) British Pound 6.72%

Mar. 31, 2014

Index Weight as Index Weight as Company Name Ticker Exchange Company Name Ticker Exchange of Mar. 31, 2014 of Mar. 31, 2014 1 Teva Pharmaceutical Industries TEVA IT 14.80% 53 First Intl Bank of Israel FTIN IT 0.38% 2 Perrigo Company plc PRGO UN 9.28% 54 Delek Automotive Systems DLEA IT 0.38% 3 Check Point Software (US) CHKP UQ 6.97% 55 Ceva Inc CEVA UQ 0.37% 4 Amdocs Ltd DOX UQ 5.06% 56 Rami Levi Chain Stores RMLI IT 0.37% 5 Bank Hapoalim BM Reg POLI IT 4.04% 57 Mazor Robotics Ltd. MZOR IT 0.36% 6 Bank Leumi Le-Israel BM LUMI IT 3.65% 58 Ituran Location & Control Ltd ITRN IT 0.36% 7 Stratasys Ltd SSYS UQ 2.76% 59 Kamada KMDA IT 0.35% 8 VeriFone Systems Inc PAY UN 2.67% 60 AMOT Investment Ltd AMOT IT 0.35% 9 Israel Chemical Corp ICL IT 2.65% 61 Nova Measuring Instruments NVMI IT 0.34% 10 BEZEQ ISRAELI TELECOM CORP BEZQ IT 2.15% 62 MELISRON Ltd. MLSR IT 0.32% 11 Nice Systems Ltd NICE IT 1.84% 63 Clicksoftware Technologies CKSW UQ 0.32% 12 VERINT SYSTEMS VRNT UQ 1.63% 64 888 Holdings Plc 888 LN 0.32% 13 Delek Group Ltd DLEKG IT 1.61% 65 Delta-Galil Industries DELT IT 0.32% 14 Opko Health Inc OPK UN 1.47% 66 ALLOT COMMUNICATIONS ALLT UQ 0.32% 15 Israel Corp ILCO IT 1.36% 67 Alon Usa Energy ALJ UN 0.30% 16 Mizrahi Tefahot Bank Ltd MZTF IT 1.26% 68 Menorah Insurance Co Ltd 1 MMHD IT 0.30% 17 Taro Pharmaceutical Industries TARO UN 1.19% 69 Naphtha Israel Petroleum NFTA IT 0.30% 18 Delek Energy Systems Ltd DLEN IT 1.15% 70 Shufersal Ltd. SAE IT 0.30% 19 MELLANOX TECH MLNX UQ 1.13% 71 Global City Holdings NV GCH PW 0.30% 20 Israel Discount Bank 0.1 DSCT IT 1.10% 72 21 Playtech PTEC LN 1.08% Africa Israel Properties AFPR IT 0.29% 73 22 Imperva Inc IMPV UN 0.94% Electra (Israel) ELTR IT 0.28% 74 23 Elbit Systems Ltd ESLT IT 0.94% Photomedex Inc PHMD UQ 0.28% 75 24 Delek US Holdings DK UN 0.86% Evogene Ltd. EVGN IT 0.28% 25 Azrieli Group AZRG IT 0.79% 76 Telit Communications Plc TCM LN 0.27% 26 Gazit Globe 1982 Ltd GZT IT 0.75% 77 Brainsway Ltd. BRIN IT 0.27% 27 Caesar Stone Sdot Yam Ltd CSTE UQ 0.72% 78 Africa-Israel Inv Ltd AFIL IT 0.27% 28 Frutarom FRUT IT 0.71% 79 Israel Phoenix Assurance 1 PHOE1 IT 0.26% 29 SodaStream International Ltd SODA UQ 0.67% 80 Audiocodes Ltd AUDC UQ 0.26% 30 Paz Oil Company Ltd PZOL IT 0.65% 81 Clal Biotechnology Industrie CBI IT 0.26% 31 Cellcom Israel Ltd. CEL IT 0.62% 82 Gilat Satellite Networks GILT IT 0.25% 32 Ezchip Semiconduct EZCH IT 0.61% 83 PLURISTEM THERAP PSTI UQ 0.25% 33 Partner Communications Co Ltd PTNR IT 0.60% 84 Jerusalem Economic Corp ECJM IT 0.24% 34 Discount Investment Corp DISI IT 0.59% 85 Matrix MTRX IT 0.24% 35 Radware Ltd RDWR UQ 0.57% 86 DSP Group DSPG UQ 0.23% 36 Harel Insurance Inv Ltd 1 HARL IT 0.55% 87 Oil Refineries Ltd ORL IT 0.23% 37 Osem Investment OSEM IT 0.53% 88 Bayside LandCorp 1 BYSD IT 0.22% 38 LivePerson Inc LPSN UQ 0.52% 89 FIBI Hldgs FIBI IT 0.22% 39 Strauss Group STRS IT 0.49% 90 Mivtach Shamir Hldgs Ltd MISH IT 0.21% 40 Plus500 Ltd PLUS LN 0.48% 91 Al-Rov (Israel) Ltd ALRO IT 0.20% 41 Orbotech Ltd (US) ORBK UQ 0.48% 92 Perion Network Ltd PERI UQ 0.20% 42 Migdal Insurance Hdlgs MGDL IT 0.48% 93 FOX WIZEL LTD FOX IT 0.20% 43 Ormat Technologies ORA UN 0.46% 94 Sapiens Intl Corp SPNS UQ 0.20% 44 Shikun & Binui Ltd. SKBN IT 0.46% 95 Alcobra Ltd ADHD UQ 0.19% 45 Clal Insurance Enterprises Hldgs CLIS IT 0.46% 96 Medgenics Inc MDGN UA 0.19% 46 Aloni Hetz Properties ALHE IT 0.45% 97 Elco Hldgs ELCO IT 0.19% 47 Compugen Ltd CGEN UQ 0.44% 98 Attunity Ltd. ATTU UQ 0.19% 48 Jerusalem Oil Exploration JOEL IT 0.42% 99 Wix.com Ltd WIX UQ 0.19% 49 Syneron Medical Ltd ELOS UQ 0.41% 100 Property & Building Corp PTBL IT 0.18% 50 Ormat Industries ORMT IT 0.40% 101 Ceragon Networks [US CRNT UQ 0.16% 51 NITSBA Hldgs (1995) Ltd NTBA IT 0.40% 102 Babylon Ltd. BBYL IT 0.09% 52 Silicom Limited SILC UQ 0.38%

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 Mar. 31, 2014 Performance (Q1 vs USD (Q1 to BIGI Mar. 31, 2014 2014) 2014) Performance Dual-Listed 36.49% 4.88% Israel – New Israeli Constituents Shekel 55.30% -0.55% -0.30% (TASE) Constituents With No TASE 30.38% 1.83% US - US Dollar Listing (NYSE, NASDAQ, 42.24% 0.00% 0.00% AMEX) Technology Constituents UK – GB Pound 24.27% 1.53% 2.15% 0.66% 0.01% With No TASE (London) Listing Poland – Polish Zolty 0.30% -0.13% 0.00% (Warsaw)

Total Direct Effect of Currency Fluctuation - - -0.29% on BIGI Price Level

BlueStar Israel Global Index Constituent Attribution vs Peers

BIGI Weight BIGI Weight Q1 2014 Positive Q1 2014 Negative Relative to MSCI Relative to MSCI Company Name Relative Weight Company Name Relative Weight Israel Capped Israel Capped Attribution Attribution Index Index

VeriFone Systems Inc 2.67% 0.70% Teva Pharmaceutical -10.06% -2.92% Amdocs Ltd 5.06% 0.64% Stratasys Ltd 2.76% -0.59% Plus500 Ltd 0.48% 0.45% Nice Systems Ltd -2.39% -0.19% Check Point Software 6.97% 0.34% Israel Chemical Corp -3.77% -0.18% Bank Leumi -4.52% 0.21% BEZEQ -3.08% -0.15% Opko Health 1.47% 0.15% Delek US Holdings 0.86% -0.13% VERINT SYSTEMS 1.63% 0.15% Frutarom -0.82% -0.12% Babylon Ltd. -0.46% 0.15% Bank Hapoalim -6.04% -0.11% Clal Biotechnology 0.26% 0.15% LivePerson Inc 0.52% -0.10% Imperva 0.94% 0.15% Playtech 1.08% -0.08%

MT Target 2: 310-325

MT Target 1 Met: 270-275

Strong Support Area MT Support: ~10-15% Below 245-250

LT 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.

The two parallel trend lines connecting the tops in 2008 and 2011, and now 2014, in the chart above were confirmed in March and early April as the most significant area of interest in the long-term chart of BIGI. The highest of the two trend lines should serve as major resistance for the index in the short- to medium-term. At the present date, that line would also equal the measured target from the 2009 lows with respect to the 2012 low. If theses trend lines are broken, which we suspect they will be over the medium-to-long term, they will likely turn into a key support area for the index and serve as a strong base for this multi-year bull-market to continue onward from. For the time being, we must respect strong resistance, especially against a backdrop of the volatile global markets in Q1 2014.

MT Target 2 Met: 285 Strong Support Area MT Target1/ ST Support ~8% Below Met: 275

Mid-Term Support: 1 255-260

MT Support: 2 240- 245

TEVA (14.80 % of BIGI)

50-Day Simple Moving Average We closely follow chart patterns of the largest 200-Day Simple Moving Average 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. The theme last quarter was “The Trend is Your Friend Until It Bends,” and the BIGI benchmark as well as its top five constituents were all trending higher heading into Q1 2014. The trend has bent in Perrigo and Check Point but Teva, Amdocs, and Bank Hapoalim still look strong.

Perrigo Co. (9.28%) Check Point Software (6.97%)

Amdocs (5.06%) Bank Hapoalim (4.04%)

Q1 2014 Q4 2013 Q3 2013 Q2 2013 Q1 2013 GICS Sector Performance Performance Performance Performance Performance Health Care 4.97% 1.39% 1.14% -0.09% 2.08% Information Technology 1.66% 3.34% 3.08% 0.10% 0.95% Financials 0.51% 2.32% 2.06% -0.13% 1.13% Materials 0.24% -0.10% -0.35% -1.47% 0.73% Industrials 0.09% 0.87% 0.62% -0.03% 0.55% Telecom Services -0.04% 1.37% 1.11% -0.07% 0.41% Utilities -0.09% 0.09% -0.16% 0.02% -0.05% Consumer Staples -0.15% 0.35% 0.10% 0.25% 0.20% Energy -0.36% 0.67% 0.41% -0.85% 1.23% Consumer Discretionary -0.38% -0.11% -0.10% 0.62% 0.38% Health Care The Health Care Sector rose by nearly 5 percentage points during the first quarter of 2014. There are roughly 15 Health Care companies in the BlueStar Israel Global Index but the rally in the sector was not broad-based. In fact most of the gains were attributable to just four companies: Teva, Clal Biotech Industries, Taro Pharmaceuticals and Opko Health. Teva, the highest- weighted constituent in all major Israeli equity benchmarks rose by roughly 29% during the quarter. Teva’s stock was boosted by key court decisions in the U.S., new drug launches, less concern over immediate competitive threats to the company's most important products, and several positive analyst reports on the company.

Unfortunately, rallies in benchmarks such as the rally during Q1 can be misleading. Unlike the rally in the Information Technology sector over the past few quarters, the rally in the Health Care Sector (and most major Israeli equity indexes) were not broad-based in Q1 2014. This means that one of the primary reasons the Health Care sector (and indexes like BIGI and MSCI Israel) posted such a large gain in Q1 was because of the rally in shares of Teva. This does not signal strength for a continued rally in the broader sector.

Information Technology

The Information Technology sector posted its sixth straight quarterly gain since the late 2012 lows. Similar to the Health Care sector though, the nature of the gains in the first quarter of 2014 were different than in the preceding periods. In the third and fourth quarters of 2013 we reported broad-based gains in the Information Technology Sector with 85-90% of the components of that sector posting gains. In the first quarter of 2014, only 18 out of 30 components posted gains which, while still a majority, signifies a bit of weakness in the sector.

Silicom Limited, ClickSoftware, and Telit Communications where the three largest percentage gainers in the Information Technology sector during the first quarter. Silicom is a leader in high-performance networking and data infrastructure solutions designed to increase data center efficiency. ClickSoftware is a leading provider of work force management solutions and applications, specializing in the service sector. Telit Cmmunications is one of the three main players in the emerging Machine-to-Machine communications industry enabling new technologies from smart meters to driverless cars, trains and planes. Telit has thousands of customers globally, in a diverse range of industries.

A key source of Israel’s economic resiliency and growth is the ability of its companies to tap international markets and the government’s efforts to forge economic and security agreements with foreign governments and agencies. In the first quarter of 2014, several initiatives involving foreign companies or governments were launched, including:

.Lockheed Martin and EMC are setting up an Israeli Center for a cyber security project .Israel Chemicals will develop an Ethiopian potash mine .Israeli and Indian representatives are planning to launch a $40 million technology investment fund .Trade representatives from the U.S. removed Israel from a list of countries that do not adequately protect intellectual property rights

The majority of Israel’s exports are to the U.S. and European countries. Nearly 20% of Israel’s 2012 exports were to Asian countries including China and India. While trade between Israel other Western countries is expected to rebound, Israeli policy makers sought to strengthen trade ties or begin free trade agreement negotiations with countries in Asia and Latin America during 2013. As Israel develops stronger trade ties with these regions in 2014 and 2015, Israel’s economy will become more diversified by export destination thus adding another layer of stability and potential for growth to one of the most important sectors of the economy, the export sector.

Capital Markets

TASE Equity and Convertibles Market Vitals at Mar. 31, 2014 The trend of quarterly increases in capital raised on the TASE and daily Average Daily turnover in equities listed on the TASE in Q4 2013 continued into Q1 2014. In Number of Listed Market Cap (USD) Turnover (USD Companies Mar. 31, 2014/Dec. just the first three months of the year, companies raised $1.15 billion in equity mm) 2014 2014/2013 31, 2013 and convertibles offerings which is half the amount raised in all of 2013. YTD/2013 Additionally, average daily turnover on the TASE rose by 15% in Q1 2104 488/508 218.7/203.3 Billion 370/324 compared to the previous quarter. Number of Public New Capital While these trends are quite positive, regulators and exchange officials are still Issues 2014 Raised (USD) 2014 YTD/2013 YTD/2013 exploring ways to induce more listings and liquidity on the TASE and to attract some of Israel’s most exciting private companies to chose the TASE over an 22/95 1.15/ 2.13 billion international exchange such as the London Stock Exchange of the NYSE for their IPO. For example, the inter-ministerial committee for promoting investment in public R&D companies submitted a report to the Israel Securities Authority in January. The report made several recommendations for helping encourage high-tech companies to tap the TASE for financing. Methods for tapping the TASE for financing would include either an IPO for some of the larger companies, or by the establishment of public venture capital funds which would invest in smaller and earlier-stage companies.

We also view BlueStar Index’s BlueStar Israel Global Index and BlueStar Israel Global Technology Index as setting a trend in attracting foreign investors’ attention to the investment opportunities in Israel, by offering investable benchmarks that reflect the true nature of the Israeli economy. BlueStar Indexes achieves this by including Israeli companies that are listed on exchanges other than the TASE, resulting in a much higher weighting in the Information Technology sector and other high-tech industries. Israel Non-Government Bond Index (Jan. 2010 – Mar. 2014)

The appreciation of the Shekel in 2013, relatively strong economic growth and low unemployment have reduced credit risk in Israeli debt markets and the TASE Non- Government Bond Index rose 2.38% in Q1 2014. 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 Q1/early Q2 2014. The resulting lower yields in government debt has permeated throughout the broader corporate and consumer credit markets.

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

Israeli GDP is expected to grow 3.1% in 2014 which is lower that the previous estimates of 3.3%. In 2015, GDP is expected to grow by 3.0% as the effects of the natural gas program begin to taper off for the medium-term. The first quarter saw a decline in imports while a trend in export growth is beginning to emerge against the backdrop of a stabilizing-to-weaker currency and a pick up in global trade.

Fiscal Policy and the Labor Market

The government’s budget surplus, excluding net credit, was NIS 2.3 billion in February, consistent with the seasonal path towards staying within the deficit ceiling for 2014. There was a slight increase in the unemployment rate for January along with an increase in the labor force participation rate. Nominal wages increased by 0.20% while real wages declined by 0.10% Source: OECD * Estimates as of Nov. 2013 between October and December, 2013.

Inflation and Monetary Policy

Inflation data that became available in March indicated that prices fell by Shekel/Dollar approximately 0.20% in February with marked declines in food, clothing, footwear, and communications. Inflation forecasts by the Bank of Israel for the next 12 months were unchanged but inflation expectations derived from the capital markets declined to 1.6%.

The Bank of Israel lowered its policy benchmark during the first quarter to just 75 bps. This comes at a time when the U.S. Federal Reserve is beginning to unwind its bond purchase program and, until the recent flight to safety in the U.S. capital markets, investors began indicating that they expected the Federal reserve to raise interest rates sooner than previously expected. This would mark a significant divergence in monetary policy between Israel and the U.S. If and when the U.S. equity market correction turns around, and U.S. interest rates rise again, this would have a ripple effect on the Israeli economy via real inflation and the Shekel. Jan. 1, 2010 - Mar. 31, 2014

New Israeli Shekel Performance

The Shekel weakened by approximately 50 bps vs the U.S. Dollar and by Shekel/Euro approximately 65 bps vs the Euro during the first quarter of 2014. The upward pressure on the Shekel has diminished and could be on the verge of changing course. The standard deviation of changes in the Shekel-Dollar rate declined in March but implied volatility derived from OTC Shekel-Dollar options has been increasing, indicating expectations for a bigger move by the Shekel in the months ahead. While a strong local currency lowers discount rates in the capital markets, boosts purchasing power and lowers real inflation, the strong shekel has had a noticeable negative impact on Israeli exporters.

However, the Bank of Israel is seeing an uptick in exports and is increasing its forecast for 2014 export growth. We believe the increase in export growth forecast is due in part to a pick up in global trade but also because the Bank Jan. 1, 2010 - Mar. 31, 2014 of Israel believes the shekel’s appreciation is either over or will be less dramatic than it has been over the past few years.

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