Bluestar Israel Quarterly Update Q3 2013 Final.Pptx

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BlueStar Israel Equity Update Third Quarter 2013

Q2 2013 in Review & Second Half 2013 Outlook

What’s Inside Ø Global developed market equities pulled back slightly in Q2 2013 while U.S. stocks, as measured by the S&P 500 index, bucked the trend and posted a rise of 2.91%.

Ø The BlueStar Israel Global Index was down by 95 bps in Q2 2013 while the MSCI Israel and TA-100 indexes were down 4.16% and 2.76%, respectively. 1. The BlueStar Ø Israeli consumer stocks, which are correlated with both domestic consumption as well as consumer spending in Israel’s export markets, lead Israeli Global Equities in Q2, while the Israel Global financial and energy stocks, which lead the Israeli Global Equity market’s rebound from the Index in Q1 2012 lows, consolidated.

2013 Ø The Israeli government decided on a 2013 and 2014 budget that will result in tax increases and spending cuts and the Shekel’s sharp appreciation versus the dollar and euro eased a bit.

2-5. About the Ø Mellanox Technologies announced it will delist its shares from the Tel Aviv Stock Exchange and the TASE’s bid to be included in MSCI’s European regional indexes was declined. Both BlueStar Israel events sparked concern about the future of the local exchange. Also, Israeli corporate Global Index pyramids come under attack by The Committee on Increasing Competitiveness in the Economy and the Business Concentration Law. (including Risk/ Ø The Energy sector is asserting itself as a major player in the Israeli economy, natural gas Return Data) reserve estimates and oil estimates are rising, and the government has decided upon an export strategy, clearing up uncertainty and removing some of the risk factors associated with investing in that sector. 6-10. Technical Analysis Ø The newly-elected Egyptian government was overthrown by the army and the civil war in Syria has spilled over into Lebanon and into the Golan on several occasions. The European Union passed a funding ban on organizations operating in the “occupied territories.” 11. Israeli Sector BIGI Performance Highlights (BlueStar Israel Global Index, Jan 2010- June 2013) 150

12. Capital 140 Markets 130

13. Israeli 120 110 Economic S&P 500 Index Level Review 100

BIGI Index Level 90 14. Geopolitical Environment 80 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 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.

Comparave Sector Weights Comparave Risk MSCI - FTSE YTD Sector BIGI TA-25 TA-100 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception EIS Israel 6/28/13 Info. Technology 28.6% 10.5% 6.7% 11.9% 12.0% ACWI 9.18% 6.98% 15.85% 20.94% 16.55% 17.02% 15.63% Health Care 23.7% 23.4% 48.3% 20.6% 23.5% EAFE 13.14% 9.51% 18.30% 22.98% 18.20% 18.03% 16.91% Financials 19.5% 32.5% 21.8% 30.2% 30.9% MSCI EM 9.69% 11.45% 20.86% 27.78% 24.02% 25.00% 23.88% Energy 8.6% 4.4% 3.8% 12.6% 9.7% S&P 500 7.69% 6.74% 13.57% 18.42% 14.58% 16.15% 14.99% Materials 7.3% 13.1% 9.2% 11.2% 9.9% MSCI 8.05% 10.87% 19.58% 21.46% 18.93% 24.50% 24.07% Industrials 3.4% 4.8% 2.7% 2.4% 4.2% Israel Telecom Services 3.2% 6.9% 4.9% 8.6% 6.1% TA-100 8.20% 10.02% 19.15% 24.86% 21.92% 24.72% 24.59% Consumer Disc. 2.9% 0.6% 0.4% 0.0% 0.7% TA-25 8.72% 10.67% 19.71% 24.73% 22.09% 24.97% 24.61% Consumer Staples 2.3% 3.8% 2.2% 2.5% 3.1%

BlueStar 5.57% 6.90% 19.05% 23.76% 20.35% - Utilities 0.5% 0.0% 0.0% 0.0% 0.0% - Source: BlueStar Global Investors LLC *Annualized June 30 2013 Incepon Date: Dec. 1992 Source: BlueStar Global Investors LLC June 30 2013

Long- Term Returns Five Year Correlaons YTD MSCI 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception ACWI MSCI EM EAFE S&P 500 TA-100 TA-25 6/28/13 Israel ACWI 1.00 ACWI 6.38% 17.21% 12.96% 2.86% 8.14% 4.48% 7.60% MSCI EM 0.94 1.00 EAFE 4.47% 19.14% 10.55% -0.16% 8.16% 4.06% 6.52% MSCI EM -9.40% 3.23% 3.72% -0.11% 14.02% 10.05% 8.04% EAFE 0.98 0.92 1.00 S&P 500 13.82% 20.60% 18.45% 7.01% 7.30% 4.24% 8.66% S&P 500 0.97 0.86 0.92 1.00 MSCI MSCI 2.65% 5.06% -5.84% -5.00% 5.87% 5.56% 5.27% 0.71 0.76 0.68 0.66 1.00 Israel Israel TA-100 4.68% 18.57% 4.82% -0.02% 10.84% 8.46% 7.16% TA-100 0.84 0.86 0.80 0.79 0.85 1.00

TA-25 2.92% 20.81% 6.05% 0.19% 12.28% 8.93% 7.48% TA-25 0.85 0.87 0.82 0.80 0.86 0.99 1.00

BlueStar 6.59% 18.68% 6.45% 2.63% 12.56% - BlueStar 0.86 0.87 0.83 0.81 0.88 0.98 0.97 - *Annualized Incepon Date: Dec. 1992 Source: BlueStar Global Investors LLC Source: BlueStar Global Investors LLC June 30 2013 June 30 2013

Index Weight as Index Weight as Company Name Ticker Exchange Company Name Ticker Exchange of June 18 2013 of June 18 2013 1 TEVA PHARMACEUTICAL IND LTD TEVA TASE 12.50% 48 PROTALIX BIOTHERAPEUTICS INC PLX AMEX 0.47% 2 PERRIGO CO PRGO NASDAQ 8.51% 49 CEVA INC CEVA NASDAQ 0.45% 3 CHECK POINT SOFTWARE TECH CHKP NASDAQ 6.46% 50 OIL REFINERIES LTD ORL TASE 0.45% 4 AMDOCS LTD DOX NASDAQ 4.96% 51 ALLOT COMMUNICATIONS LTD ALLT NASDAQ 0.44% 5 ISRAEL CHEMICALS LTD ICL TASE 4.10% 52 DELEK AUTOMOTIVE SYSTEMS LTD DLEA TASE 0.43% 6 BANK HAPOALIM BM POLI TASE 4.04% 53 888 HOLDINGS PLC 888 LN 0.43% 7 BANK LEUMI LE-ISRAEL LUMI TASE 3.90% 54 DELEK ENERGY SYSTEMS LTD DLEN TASE 0.43% 8 STRATASYS LTD SSYS NASDAQ 2.27% 55 ORMAT INDUSTRIES LTD ORMT TASE 0.42% 9 VERIFONE SYSTEMS INC PAY NASDAQ 2.24% 56 GIVEN IMAGING LTD GIVN NASDAQ 0.41% 10 BEZEQ THE ISRAELI TELECOM CO BEZQ TASE 2.15% 57 RAMI LEVI CHAIN STORES HASHI RMLI TASE 0.41% 11 ISRAEL CORP LIMITED/THE ILCO TASE 2.07% 58 CLAL INDUSTRIES LTD CII TASE 0.41% 12 NIC E SYSTEMS LTD NIC E TASE 2.00% 59 PROLOR BIOTECH INC PBTH NASDAQ 0.40% 13 MELLANOX TECHNOLOGIES LTD MLNX NASDAQ 1.78% 60 SYNERON MEDICAL LTD ELOS NASDAQ 0.40% 14 VERINT SYSTEMS INC VRNT NASDAQ 1.60% 61 NITSBA HOLDINGS (1995) LTD NTBA TASE 0.40% 15 ISRAMCO NEGEV 2 LP ISRAL TASE 1.36% 62 SHUFERSAL LTD SAE TASE 0.37% 16 PLAYTECH PLC PTEC LN 1.25% 63 MELISRON MLSR TASE 0.37% 17 ISRAEL DISCOUNT BANK-A DSCT TASE 1.25% 64 MENORAH MIVTAC HIM HOLDINGS L MMHD TASE 0.37% 18 DELEK US HOLDINGS INC DK NYSE 1.24% 65 ITURAN LOCATION AND CONTROL ITRN TASE 0.35% 19 MIZRAHI TEFAHOT BANK LTD MZTF TASE 1.23% 66 CAESARSTONE SDOT-YAM LTD CSTE NASDAQ 0.35% 20 SODASTREAM INTERNATIONAL LTD SODA NASDAQ 1.11% 67 AMOT INVESTMENTS LTD AMOT TASE 0.35% 21 DELEK GROUP LTD DLEKG TASE 1.04% 68 JOEL-JERUSALEM OIL EXPLORATI JOEL TASE 0.34% 22 GAZIT GLOBE LTD GZT TASE 1.00% 69 COMPUGEN LTD CGEN NASDAQ 0.34% 23 ELBIT SYSTEMS LTD ESLT TASE 0.96% 70 KAMADA LTD KMDA TASE 0.34% 24 AVNER OIL EXPLORATION - LP AVNRL TASE 0.91% 71 PHOTOMEDEX INC PHMD NASDAQ 0.33% 25 AZRIELI GROUP AZRG TASE 0.88% 72 NOVA MEASURING INSTRUMENTS NVMI TASE 0.33% 26 TARO PHARMACEUTICAL INDUS TARO NYSE 0.87% 73 AFRICA-ISRAEL INV LTD AFIL TASE 0.33% 27 FIRST INTL BANK ISRAEL FTIN TASE 0.81% 28 EZCHIP SEMICONDUCTOR LTD EZCH TASE 0.79% 74 CLICKSOFTWARE TECHNOLOGIES CKSW NASDAQ 0.33% 29 PAZ OIL CO LTD PZOL TASE 0.74% 75 PHOENIX HOLDINGS LTD/THE PHOE1 TASE 0.32% 30 IMPERVA INC IMPV NYSE 0.73% 76 CINEMA CITY INTERNATIONAL NV CCI Warsaw 0.32% 31 OSEM INVESTMENTS LTD OSEM TASE 0.70% 77 GILAT SATELLITE NETWORKS LTD GILT TASE 0.31% 32 RADWARE LTD RDWR NASDAQ 0.64% 78 EVOGENE LTD EVGN TASE 0.31% 33 HAREL INSURANCE INVESTMENTS HARL TASE 0.63% 79 BABYLON LTD BBYL TASE 0.30% 34 DELEK DRILLIN - LP DEDRL TASE 0.62% 80 DSP GROUP INC DSPG NASDAQ 0.30% 35 STRAUSS GROUP LTD STRS TASE 0.61% 81 SILICOM LTD SILC NASDAQ 0.30% 36 RATIO OIL EXPLORATION RATIL TASE 0.61% 82 PLURISTEM THERAPEUTICS INC PSTI NASDAQ 0.30% 37 MIGDAL INSURANCE & FINANCIAL MGDL TASE 0.60% 83 AFRICA ISRAEL PROPERTIES LTD AFPR TASE 0.28% 38 FRUTAROM FRUT TASE 0.57% 84 BAYSIDE LAND CORP (1) BYSD TASE 0.28% 39 CELLCOM ISRAEL LTD CEL TASE 0.55% 85 KOOR INDUSTRIES LTD KOR TASE 0.27% 40 LIVEPERSON INC LPSN NASDAQ 0.54% 86 MAZOR ROBOTIC S LTD MZOR TASE 0.26% 41 PARTNER COMMUNICATIONS CO PTNR TASE 0.54% 87 AUDIOCODES LTD AUDC NASDAQ 0.26% 42 SHIKUN & BINUI LTD SKBN TASE 0.52% 88 JERUSALEM ECONOMY LTD ECJM TASE 0.26% 43 CLAL INSURANCE ENTERPR HLDGS CLIS TASE 0.52% 89 FIBI HOLDINGS FIBI TASE 0.26% 44 ALONY HETZ PROPERTIES & INV ALHE TASE 0.51% 90 BRAINSWAY LTD BRIN TASE 0.25% 45 ORBOTECH LTD ORBK NASDAQ 0.51% 91 CERAGON NETWORKS LTD CRNT NASDAQ 0.25% 46 ORMAT TECHNOLOGIES INC ORA NYSE 0.49% 92 DISCOUNT INVESTMENT CORP-REG DISI TASE 0.24% 47 ALON USA ENERGY INC ALJ NYSE 0.49% 93 GIVOT OLAM OIL EXPLORAT- LP GIVOL TASE 0.11%

3 © 2013 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security June 2013 BlueStar Israel Global Index Rebalance Review BIGI Addions Stratasys (SSYS:NASDAQ) 2.27% of BIGI Global Provider of three-dimensional prinng soluons including 3D printers, prinng resin and services. Operates in the Informaon Technology sector.

Compugen (CGEN:TASE,NASDAQ) 0.34% of BIGI Develops products used to analyze DNA generated by high throughput sequencing. Develops bioinformacs hardware and soware. Operates in the Health Care sector.

Photomedex (PHMD:NASDAQ) 0.33% of BIGI Global skin health soluons company providing disease management and aesthec soluons to dermatologists, professional aesthecians and consumers. Operates in the Health Care sector.

Silicom (SILC:TASE, NASDAQ) 0.30% of BIGI Provider of connecvity and networking soluons to the networking industry. Operates in the Informaon technology sector.

Mazor Robocs (MZOR:TASE,NASDAQ) 0.26% of BIGI Develops and delivers roboc guidance systems for spinal surgery. Operates in the Health Care sector.

Audiocodes (AUDC:TASE,NASDAQ) 0.26% of BIGI Designs, develops and markets voice and data products and services over packet networks including voice over packet and internet protocol, as well an internet protocol phones and media gateways. Operates in the Informaon Technology sector.

FIBI Holdings (FIBI:TASE) 0.26% of BIGI The parent company of First Internaonal Bank of Israel and other banking subsidiaries in Israel. Operates in the Financials sector.

Brainsway (BRIN:TASE) 0.25% of BIGI Patented technology for a non-invasive soluons for Major Depressive Disorder which has been approved by the FDA. Operates in the Health Care sector.

Discount Investment Corp (DISI:TASE) 0.24% of BIGI Major holding company in Israel operang in the communicaons, technology, retail, real estate and industrial sectors. Holdings include Cellcom, Koor Industries, Shufersal, and Given Imaging. Operates in the Financials sector.

BIGI Internal Characteriscs Aribuon (currency and exchange lisng)

Currency Aribuon Exchange-Related Aribuon

Total Index Weight Aribuon of Local Currency Aribuon of Listed on Local Currency Performance vs Total Index Weight as Category to BIGI Exchange(s) as of Performance to USD (Q2 2013) of June 28 2013 Performance (Q2 June. 28 2013 BIGI Performance 2013)

Israel – New Israeli Dual-Listed 32.00% -0.10% Shekel 70.18% 0.82% 0.78% Constuents (TASE) Non-TASE 29.58% -0.47% US - US Dollar Constuents (NYSE, NASDAQ, 27.90% 0.00% 0.00% AMEX) Non-TASE Technology 24.09% -0.31% UK – GB Pound 1.59% 0.39% 0.01% Constuents (London)

Poland – Polish Zolty 0.30% -1.27% -0.00% (Warsaw)

Total Direct Eﬀect of Currency Fluctuaon on - - 1.80% BIGI Price Level

BlueStar Israel Global Index Constuent Aribuon vs MSCI Israel (capped)

BIGI Weight BIGI Weight Q2 2013 Q2 2013 Posive Relave to MSCI Relave to MSCI Negave Company Name Relave Weight Company Name Israel Capped Israel Capped Relave Weight Aribuon Index Index Aribuon

Israel Chemical Corp -4.51% 1.06% VeriFone Systems Inc 2.44% -0.46%

SodaStream Internaonal 1.13% 0.53% Radware Ltd 0.61% -0.39%

Check Point Soware (US) 6.77% 0.39% Delek US Holdings 1.14% -0.31%

Israel Corp -1.06% 0.22% LivePerson Inc 0.58% -0.20%

Bank Leumi Le-Israel BM -3.84% 0.22% Alon Usa Energy 0.44% -0.11% Teva Pharmaceucal -11.42% 0.21% Isramco Negev 2 LP 1.17% -0.09% Industries Perrigo Co 8.87% 0.17% Osem Investment -0.78% -0.07%

MELLANOX TECH -1.56% 0.17% Ezchip Semiconduct -0.62% -0.07%

Imperva Inc 0.87% 0.15% Frutarom -0.52% -0.06%

Orbotech Ltd (US) 0.54% 0.13% Syneron Medical Ltd 0.42% -0.06%

The consolidaon of Israeli Global Equies, as measured by BIGI, which began in April of this year, connued through the end of the second quarter but was broken by a surge in Israeli Global Equies in early July. We consider this a major breakout – one which we’ve been ancipang for many months – and it conﬁrms our bullish bias toward the market.

Aer breaking important trend lines in November 2012 (during Israeli Global Equies’ rebound from the sharp drop at the beginning of Operaon Pillar of Defense), the BlueStar Israel Global Index (BIGI) consolidated in December and resumed its upward movement in January and February 2013. The market selloff during Operaon Pillar of Defense to the 200 index level for BIGI confirmed that this is a significant medium and long term level of support for the index.

On the three-year chart on the following pages, we see that BIGI was consolidang, within a trading range roughly between 228 and 238. The range was occurring within the context of an upward trend. The upper band of the range was also the connuaon of a resistance line connecng the Q4 2011 and Q2 2012 peaks, represented by the solid black line on the three year chart. Addionally, over the course of this consolidaon, the 30 and 100 day moving averages had a chance to catch up to the index on the three year chart and the index ended June below both moving averages. The June low at roughly 228 coincided with both the lower band of the range described above and the upward trend line connecng the 2012 low and the low point in Israeli Global Equies during Operaon Pillar of Defense. The 228 level proved to be a signiﬁcant level of support for the index as Israeli Global Equies rebounded from that point and broke through the aforemenoned 238 resistance level in early July. Addionally, although the index did probe below both the 30 and 100 day moving averages, the shorter term average did not cross the longer term moving average and both are now poinng upwards, indicang a connuaon of the bullish trend in the index.

The longer-term outlook for Israeli equies connues to be ﬁrmly bullish as the index re-entered, and then broke through the channel connecng the 2008/2009 lows back in late 2012, as illustrated in the BIGI six- year chart on the following pages. So long as the index remains above this channel, the longer-term outlook for Israeli Global Equies remains decidedly bullish. In May, we noted in our Monthly Update that it appeared as if the 50 Day SMA had moved too far too fast ahead of the 200 day SMA on the six year chart and we wouldn’t be surprised to see further consolidaon or a short-term pull back in the index. The 200 Day SMA, in our view, caught up enough to the 50 Day SMA in June to jusfy a further rise in the underlying BIGI index.

Based on both the three and six year charts, as the Index decisively broke above the resistance line at around 238, we’d expect BIGI to reach the 300 level by the end of 2013 or beginning of 2014 -- likely aer hing resistance between 255 and 260 and a consolidaon between 270 and 280. Risk parameters for those with a short-term me horizon should view a daily close below the 228 level, which would indicate a break below both the upward trend line and support level of the consolidaon range, as a sell signal/ inial stop loss. If this occurs, then a weekly close below the 220 level, from which BIGI broke out in December 2012, would be a secondary stop-loss level. On the six-year chart, a break below the 220 level should act as a warning sign. A weekly close below the 2012 low of 195, however, would shi the longer-term outlook dramacally and any rallies should be sold. Given the decisive breakout of early in this quarter, we consider the probability of a major drop like this quite unlikely, especially as key global markets such as the US and Japan – as well as Developed Europe – appear to be resuming their bullish trends aer the late-spring/early-summer ‘tapering scare.’ regarding US monetary policy

6 BlueStar Israel Global Index Technical Analysis

Source: BlueStar Global Investors LLC (Jan 1 2010- July 18 2013)

Source: BlueStar Global Investors LLC (Jan 1 2010- July 18 2013) 7

BlueStar Israel Global Index Technical Analysis

Source: BlueStar Global Investors LLC (January 1 2007- July 18 2013)

Source: BlueStar Global Investors LLC (January 1 2007- June 18 2013) 8 Technical Analysis: Top Ten Holdings (BIGI Weights as of June 2013 Rebalance)

TEVA (12.50% of BIGI)

We closely follow chart paerns of the largest BIGI constuents or BIGI constuents that are components of key sectors in the index such as technology and health care. We have been observing bullish chart formaons and breakouts in many key BIGI constuents towards the end of June and beginning of July, including Teva, Perrigo, Check Point, Amdocs, Imperva, Orbotech, Taro Pharmaceucals, and Mellanox Technologies.

Perrigo Co. (8.51%) Check Point Soware (6.46%)

50-Day Simple Moving Average Amdocs (4.96%) 200-Day Simple Moving Average Israel Chemicals (4.10%)

Bank Hapoalim (4.04%) Bank Leumi (3.90%)

Stratasys (2.27%) VeriFone Systems (2.24%)

Bezeq (2.15%)

Consumer Services and Goods Sector Israeli Consumer stocks were the leading Q2 2013 Q1 2013 Q4 2012 Q3 2012 As defined by groups of stocks in Q2 2013, compleng Performance Performance Performance Performance BlueStar Indexes their fourth consecuve quarter of gains. Consumer stocks were lead higher by Consumer Discreonary 0.62% 0.38% 0.04% 0.22% SodaStream Internaonal and food-related Consumer Staples 0.25% 0.20% 0.12% -0.03% stocks including Shufersal, one of the Technology 0.10% 0.95% 1.54% 1.40% largest super market chains in Israel, and Ulies 0.02% -0.05% -0.30% -0.07% food manufacturers like Strauss and Osem Industrials -0.03% 0.55% 0.11% 0.26% Investments. SodaStream reported Telecommunicaons -0.07% 0.41% -0.40% 0.25% improving fundamentals and was also Health Care -0.09% 2.08% -1.97% 0.31% propelled higher by takeover rumors, Financials -0.13% 1.13% 4.45% 0.73% though the stock has pulled back sharply in Energy -0.85% 1.23% 2.15% 0.76% early Q3. Although the consumer Basic Materials -1.47% 0.73% -0.16% 0.93% confidence index in Israel declined in May and June, consumer spending remains healthy in Israel and in Israel’s largest export markets. Food exports from Israel to the U.S., for example, rose by over 50% over the past five years and is expected to rise by another 50% in the years to come. Addionally, the rising shekel and strong local economic growth are conducive to greater consumer spending in Israel. Lastly, though Israel is classified as a developed economy by organizaons such as FTSE and MSCI, it retains many of the demographic characteriscs of an emerging market, leading to robust consumer discreonary and services sector growth. Financials

Though the financials pulled back in Q2 2013, the sector remains well capitalized and posioned to do well as the overall economy expands. Israeli financial stocks lead Israeli Global Equies higher aer making three year lows in late 2012. The banking sector in Israel remains well capitalized. We learned in early Q3 2013 that Bank Hapoalim will distribute a dividend for the first me in two years which is a posive sign for the banking sector in Israel.

Energy

The Oil & Gas sector, like the financials, pulled back in Q2 2013 aer being amongst the market leaders in the previous several quarters. In Q2, the proven natural gas reserves in the Leviathan field were raised from 18 to 19 trillion cubic feet, and the esmated reserves in the Tamar site were raised to 10 trillion cubic feet. Also, in early Q3 it was learned that the Leviathan partners believe they may find 1.5 billion barrels of oil beneath the Mediterranean seabed. Needless to say, the Energy sector is asserng itself as a major force driving Israeli economic growth and stability. The discussion has now shied from how much gas and oil there is in Israeli territorial waters to what is the best way to export and manage these natural resource discoveries. The Israeli government has decided to allow 40% of Israel’s natural gas reserves to be exported and a poron of Israel’s gas is being set aside for immediate delivery to Jordan and the Palesnian areas. It seems as though the southern coast of Cyprus will be host to a liquefied natural gas plant which will process Israeli, Cypriot and potenally Lebanese natural gas for export: Delek Group and Noble Energy signed a Cypriot memorandum of understanding on the issue and Woodside Energy, which was expected to purchase a 30% stake in Israeli gas fields, is now considering joining the Cypriot consorum in avoidance of unfavorable tax and regulatory policy and potenal negave geopolical side effects of working in Israel.

The posive impact on Israel’s economy of the natural gas reserves is already being felt – electricity and gasoline prices have been reduced and are expected to connue on this downward path in the months and years to come. Also, fuel-related imports have accounted for roughly -6% of GDP over each of the past 7 years. When Israel becomes energy independent, it will result in a 6% rise in annual GDP and a 6% shi in the current account toward surplus. These macroeconomic side eﬀects will have far reaching consequences, such as strengthening the local currency and reducing the Israeli government’s sovereign credit risk, which will result in increased consumer spending and lower discount rates throughout Israel’s capital markets.

Israel’s Global Footprint

A key source for Israel’s economic resiliency and growth is its ability to tap internaonal markets and forge economic and security agreements with foreign governments and agencies. In the second quarter of 2013, several such developments occurred, including:

§ Formaon of new Knesset commiees focused on strengthening the trade es between Israel and China; the Chinese government is reviewing the merits of a free trade agreement with Israel. §Peru and Israel commied to agricultural cooperaon and cooperaon on water projects and industrial security. §Israel and the EU signed an open skies agreement §Three agreements between Israel and Colombia were signed: a free trade agreement, an innovaon agreement, and an aviaon agreement. §The UN held an Israel-led panel on entrepreneurship as a means of ﬁghng poverty and unemployment. §Lockheed Marn will set up an Israeli research & development center. §India and Israel agreed to start a high-tech trade fund to enhance es between Israel’s innovave IT sector and India’s burgeoning hi- tech manufacturing sector.

Equity Market

The Tel Aviv Stock Exchange has been plagued in recent quarters by steadily declining trading volumes. This has prompted oﬃcials to seek paths to higher volumes and more liquid markets. More eﬃcient and liquid markets will TASE Equity and Converbles Market Vitals at June 28, 2013 encourage more private Israeli companies to list on the local stock exchange and retain Israel as their place of business rather than selling out, somemes Number of Listed Daily Turnover Companies Market Cap (USD) (USD mm) prematurely, to private equity or internaonal companies. 2013/2012 2013 YTD/2012

An April 9th Globes’ arcle stated that 100 companies chose to delist from 521/556 171.6 Billion 302/279

the TASE between 2010 and 2012. The disconnect between Israel’s economy Number of Public New Capital and corporate sector ability to generate earnings and the eﬃciency of the Issues 2013 YTD/ Raised (USD) equity markets there is blatant. Mellanox Technologies is amongst the latest 2012 2013YTD/2012 companies to announce it will delist its shares from the TASE and have its 451 million/1.06 44/66 shares listed solely on the NASDAQ exchange. As more companies delist billion from the local exchange, the decision to allocate funds to Israeli investment vehicles becomes more complex and less appealing.

Corporate Pyramids A major issue being dealt with by the Israeli government is the concentraon in the Israel Non-Government Bond Index economy caused by Israel’s notorious corporate pyramid holding structures. Corporate (Jan 2010 – June 2013) Pyramids reduce compeon in the economy and create moral hazards by separang corporate cash flows from the decision-making process. The Knesset Finance Commiee approved a ‘pyramid clause’ in the bill on Concentraon in the Economy, liming pyramids to just two levels and ordering the separaon of financial and non -financial holdings. A potenal result is a further reducon in the number of TASE-listed companies as many lower-er holdings of these pyramids will either be merged or spun off and listed on internaonal exchanges. Investors in Israeli equies should begin taking this issue into consideraon in developing their Israel Global Equity investment strategy.

In the long run, the laws addressing concentraon in the economy will beneﬁt the local markets and the Israeli consumer, but there will be growing pains associated with these pro-market reforms.

Israel’s GDP Growth Factors Israel GDP Growth Israel vs OECD Members Economic acvity began to improve in early 2013 but more recent indicators point to a slowdown in the growth rate of economic acvity. The consumer conﬁdence index has fallen by over 22 points since April. The greatest concern is that there is a marked slow down in investment expenditures though consumer spending remains quite strong.

The Bank of Israel raised its 2013 GDP forecast slightly to 3.8% (2.8% excluding the eﬀects of natural gas). The Bank of Israel lowered its 2014 GDP forecasts slightly to 3.2% from 4.0% previously, or 2.5% excluding the eﬀects of natural gas producon.

Fiscal Policy

The Israeli government approved the 2013-2014 budget. The approved budget allows for an increase in public expenditure of 7% Source: OECD in 2013 but only 1.1% in 2014. The budget includes spending cuts * Esmates as of June 2013 across most ministries as well as tax increases, including another 1% rise in t he VAT.

In the first half of 2013, the government’s budget deficit was NIS 4.3 billion which was lower than the path consistent with the deficit ceiling for 2013 of 4.65% of GDP. Tax receipt trends indicate stability in tax collecon.

Inflation and Monetary Policy

The Bank of Israel lowered the policy interest rate several mes in 2012, capped oﬀ by a 25 basis point cut in December. The policy rate has since been lowered by 25 bps two mes to 1.75% by the end of the ﬁrst quarter and 1.25% by the end of the second quarter.

The consumer price index in May increased by 0.1 percent, which was below the average projecon of 0.3 percent. The CPI over the trailing twelve month period ending May 2013 was 0.9%, below the lower bond of the BOI’s target rate. This suggests that natural gas Jan. 1 2010 - June 28 2013 producon is contribung to a decline in fuel prices but also that economic growth is slower than expected and that the BOI may leave its policy interest rate at the record low level of 1.25% for quite some me.

New Israeli Shekel Performance

The Shekel was one of the strongest developed market currencies versus the Euro and the Dollar in Q1 2013, and was a bit volale in Q2. In Q2 2013, the BOI lowered its policy interest rate and intervened in the foreign exchange markets to help ease upward pressure on the shekel in order to support Israel’s export and manufacturing sectors. The Shekel’s strength vs the US Dollar over the past six months is especially impressive considering that the dollar strengthened against most other world currencies.

We have been aribung the strength of the shekel to relavely high interest rates, relavely high economic growth, economic and

ﬁnancial stability and resiliency, as well as to structural shis in Jan. 1 2010 - June 28 2013 Israel’s balance of payments picture deriving from the emerging energy industry there.

The divergence between Israeli and U.S. equies over the past nine months or so represents the largest performance diﬀerenal between the two markets in recent years, and we aribute this primarily to excessive fears of geopolical risks in the local market. As we have seen repeatedly, investors in Israeli markets typically overreact to geopolical risks and long-term investors are rewarded with strong outperformance once fear-based selling subsides.

Fighng from the civil war in Syria has spilled over into neighboring Lebanon and Syrian President Assad has drawn support from Iran and Hezbollah in pung weapons and soldiers on the ground in Syria. Russia connues to support President Assad and President Pun intends to impede on any Western military effort to support the rebellion in Syria. Turkey has become the latest country in Israel’s neighborhood to see mass an-government protests, and massive an- government protests combined with an asserve military has toppled the Morsi government, amounng to a second revoluon in Egypt in three years. Palesnians in Gaza fired several rockets indiscriminately into Southern Israel this month. Israel responded with one targeted strike by the Israeli Air Force. So far, these events have had a limited effect on Israel and Israel’s economy.

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