BlueStar 0717 Equity Review and Outlook Monthly Update

Israeli Equities Outperform in June Capping a Strong Joshua Kaplan Steven Schoenfeld Director of Research Chief Investment Officer First Half of 2017 1-646-380-2503 1-646-380-2501 [email protected] July 10, 2017

PerformanceReview About BlueStar Indexes Israeli Global Equities, as measured by BIGI® and tracked by the VanEck Vectors Israel ETF (NYSE: ISRA), gained 2.13% in June and 15.24% in the first half of 2017. BIGI® outpaced US equities in each of the first six BlueStar Indexes is a leading provider of research and months of the year, and has outpaced US equities and Global Developed Market equities in 2017 to-date by investment solutions for the Israeli capital markets. 5.9 and 1.4 percentage points, respectively. In June, the top performing Israeli stocks belonged to the BlueStar has been producing monthly market updates on Materials sector but domestically-oriented stocks, especially those in the Consumer Staples and Industrials the Israeli market for nearly six years. In our monthly sectors, led the Israeli market higher in 2017 to-date. BIGI® is also outperforming the MSCI Israel and TA-125 updates we provide data and insight on recent Indexes since the start of 2017 by 2.73 and 4.55 percentage points. performance of Israeli equity benchmarks, stocks and sectors driving performance, key economic data for the Israeli Global Technology stocks, as measured by the TA-BIGITech® benchmark and tracked by the BlueStar Israeli market, as well as technical analysis of our equity Israel Technology ETF (Nasdaq: ITEQ), is up 19.03% in 2017 putting it two percentage points ahead of its US indexes. Technology sector peers. Six of the top-ten performing Israeli stocks in the first half of 2017 belong to the Information Technology sector including names such as Mobileye, Wix.com, SolarEdge, and Nova Measuring The BlueStar Israel Global Index® (BIGI® or BLS & BLSTR Instruments. Also, TA-BIGITech® has outperformed the local TA-Tech Elite Index by more than 8 percentage INDEX on Bloomberg) is the broadest and deepest points since thebeginning of 2017. benchmark for Israeli equities trading worldwide including in New York, London, Singapore, Australia and Tel Aviv. The VanEck Vectors Israel ETF (ticker ISRA) tracks BIGI and is listed on the NYSE. In addition, Israel- Israel and Global Equity Benchmark Comparison domiciled investment vehicles tracking this index are Benchmark June Return (%) YTD (%) offered by Psagotand IBI. 2.13% 15.24 BIGI The TA-BlueStar Israel Global Technology Index (TA- TA-BIGITech -1.37% 19.03 BIGITech® or BGTH & BGTHTR INDEX on Bloomberg) is the broadest and deepest benchmark tracking the MSCI Israel Uncapped 6.85% 12.69 performance of Israeli companies operating in innovative TA-125 1.55% 10.69 sectors like information technology, defense technology, clean technology and bio-technology. The BlueStar TA- S&P 500 0.59% 9.34 BIGITech Israel Technology ETF (Nasdaq Ticker: ITEQ) MSCI EM 0.38% 18.43 tracks TA-BIGITech®. In addition there are two Israel- domiciled investment vehicles tracking TA-BIGITech® MSCI EAFE 0.19% 13.81 managedby KSM/Excellence.

BlueStar also maintains three additional Israel Equity 220 BlueStar Israel Global Index Indexes (BIGI-TIM, IGEI and IDEI) and one Israel Ten Year Relative Performance Ending June 2017 Government Bond Index (BIGUSD).

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20 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 BIGI TA-125 MSCI Israel Uncapped MSCI EM MSCI EAFE

www.bluestarindexes.com 1 BlueStar Israel 0717 Equity Review and Outlook Monthly Update BlueStar’sMarketPerspective In mid-2016 BlueStar asserted the view that the eight-year bull market in global equities was still intact. In fact our Comparative Economic Growth view was, and still is, that the gradual unwinding of monetary policy both in the US and in other developed markets around the world, would be a net positive for global growth and global markets: Price multiples tend to expand 4 when medium-term government bond yields rise to the 3%-6% range; expectations for rising interest rates, in our 2017 2018 view, should cause increased current consumption as borrowers look to lock in low interest rates; furthermore, we do not expect interest rates around the world to rise dramatically, which would likely serve as a major head wind 3 for global economic growth. We expect investors who moved to the short end of the yield curve during this prolonged period of low interest rates to provide support for medium-to-long-term bonds, as those investors look to take advantage of rising rates in their preferred habitat on the yield curve. Finally, monetary policy will remain 2 accommodative for the foreseeable future, even as central banks raise interest rates and diminish quantitative easing programs. 1 Our view also drew a parallel between where the developed world ex-US was at the end of 2016 and where the US was at the end of 2015. We expected to see central banks to follow in the federal reserve’s footsteps toward 0 normalizing monetary policy, economic growth and inflation perk up, and we expected non-US developed equities OECD - Israel US Europe to enjoy relatively strong performance. Developed Markets

Sources: BlueStar, OECD, Bloomberg

Mid-YearIsraelEconomicUpdate Israel has been one of the fastest-growing developed markets each year since its graduation from Emerging Market to Developed Market status in 2010. Also, except for 2015 and 2016, Israel has been a leader in equity market performance over the past ten years. Israel’s unemployment rate has hovered around an all-time low throughout the last 12 months even as the labor force participation rate was rising and both nominal and real wages were growing.

The underlying strength of the Israeli economy relative to other developed markets is once again showing up in equity market performance in 2017. Investors deploying assets in international developed markets should consider Israel when determining their allocation strategy as Israel comprises less than 0.40% of leading Developed International equity indexes such as MSCI EAFE and FTSE World ex-US.

The top right chart on this page compares the OECD’s projections for Israel’s GDP growth rate to that of the US, Europe and the OECD average. The bottom left and right charts show the breakdown of Israel’s GDP into its basic components as well as the growth of each throughout the last seven years, respectively. It can be seen that in 2013 imports decreased by a greater degree than exports which boosted Israel’s GDP. But from 2013 through 2016, the Israeli shekel strengthened and global trade slowed leading to a sharp rise in imports and a weakening of exports. That development was to the detriment of overall GDP growth (though still relatively strong) as well as the companies representing the largest component of Israel’s equity markets which are those deriving a majority of their revenue globally.

Should a period of sustained growth in global trade and economic activity in the economies of Israel’s largest trading partners occur, we would expect Israel’s trade balance to improve substantially. When Israel’s trade balance is positive and growing, overall GDP growth tends to rise to between four and five percent. Such a scenario could provide a strong tailwind to some of the largest companies in Israel’s equity market. One of the risks to our outlook, which is coming more into focus is geopolitical risk in both Asia and the Middle East with increased tension between the US and both North Korea and Iran. Also, as monetary policy becomes less accommodative, the possibility of a “less-soft landing” in Israel’s real estate market becomes more likely.

Israel GDP Component Growth Components of Israel GDP 15.00% 60%

40% 10.00%

20% 5.00%

0% 0.00% 2010 2013 2016 2011 2013 2016 -20%

-5.00% Private Consumption Public (Government) Consumption -40% Investment/Fixed Capital Formation Exports Private Consumption Public (Government) Consumption Imports Investment/Fixed Capital Formation Exports Sources: BlueStar Indexes, OECD, Bloomberg LP Imports 2 BlueStar Israel 0717 Equity Review and Outlook Monthly Update

IsraelMarketDrivers Trailing Twelve Month Comparative Total Returns The Israeli market can be segmented by those companies which 150 derive a majority of revenue domestically versus globally. The Solactive – BlueStar Israel Economic Exposure Indexes, highlighted in 140 the charts to the right, are used to track the performance of these groups of stocks. 130

In June Israeli Global Equities with predominantly global sources of 120 revenue, as measured by the Israel Global Exposure Index (IGEI), outpaced Israeli equities with primarily domestic sources of revenue, 110 as measured by the Israel Domestic Exposure Index (IDEI). This marked a departure from the strong outperformance of the IDEI over 100 theprevious 12months. Israel Domestic Exposure Israel Global Exposure 90 Trends which supported the IDEI over the previous 12 months included 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017 a strengthening currency which empowered Israeli consumer spending and imports. A related development is that Israel began its shift toward energy independence (and possibly becoming a net exporter of energy goods); this bodes well not only for Israeli Energy IEEI Performance Relative to Israel Total Investable Market Index Since companies but also for Israeli Industrial and Real Estate companies, 150 2009 which will be involved in building the infrastructure for the growing sector. The IDEI gained 44% over the past 12 months compared to a 140 gain of 28% for theIGEI. 130 Given the magnitude of IDEI’s outperformance over the last year, it 120 would not be surprising to see that trend consolidate or even reverse 110 in the coming months. Minutes from the Bank of Israel’s latest monetary policy committee meeting showed that the members’ 100 discussion focused on changes in the composition of sources and uses of economic output, which included the decline in the growth 90 rate of private consumption and increases in growth in investments 80 and exports. Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Other trends that would support our view are the rebound in leading Israel Domestic Exposure Israel Global Exposure Israel Total Investable Market Israeli pharmaceutical companies’ stock prices, the strength of the Israeli technology sector relative to the broad Israeli equity market, and the nascent recovery in global trade and economic activity in Israeli Equity Sector Performance 1H2017 Europe. GICS Sector Return (%) Consumer Staples 32.43 Industrials 29.77 Real Estate 27.20 Materials 26.83 Information Technology 25.96 Consumer Discretionary 22.85 Financials 22.18 Energy 15.20 Utilities 10.50 Telecommunication Services (3.42) Health Care (7.60)

www.bluestarindexes.com 3 BlueStar Israel 0717 Equity Review and Outlook Monthly Update

IsraeliTechnologyStockson theMove Israel’s technology sector saw one of its best six-month performance periods in the first half of Global Technology Stock Index Comparison 2017 and was a major contributor to the Israeli market’s overall performance. The rally in Israel’s technology sector was broad based: 50 out of the 71 companies included in BlueStar’s Benchmark June Return (%) YTD (%) TA-BIGITech index are up sofar this year, and 35 of those 50 are up by more than 10%. TA-BIGITech -1.37% 19.03 Software is Israel’s leading firm in the field of Cyber Security. Check Point’s stock gained 30% in the first half of 2017. Check Point was the pioneer in network perimeter security Dow Jones US Tech and invented the firewall. Today, the firm offers a range of software and hardware products for -3.22% 17.09 network and gateway security solutions, data and endpoint security. S&P Global 1200 Info Tech -1.87% 19.61 Amdocs is an enterprise software company serving major telecommunications companies in the United States and internationally. The company provides integrated customer care and MSCI EM Tech 4.28% 35.11 billing systems for wireless and wireline network operators and service providers. Amdocs’ stock is up 11% since the start of 2017. TA-Tech Elite -3.98 10.39 Wix.com operates and developed a web platform that enables businesses, organizations, professionals and individuals to develop customized websites and application platforms. Wix.com’s stock is up 56% in the first half of 2017

Contributors to BIGI Performance: First Half 2017 IsraelSectorSpotlight Positive Contributors (%) Negative Contributors(%) Mobileye Nv 2.85 Perrigo Co Plc (0.74) Israeli pharmaceutical giants Teva and Perrigo rallied throughout June after hitting multi-year lows in May. Check Point Software Tech 2.05 Teva Pharmaceutical Ind Ltd (0.66) Bank Leumi Le-israel 0.71 Opko Health Inc (0.57) Perrigo Co. is a global health care supplier that develops, Amdocs Ltd 0.64 The Israeli Telecom Co (0.26) manufactures and distributes over-the-counter and generic prescription pharmaceuticals, infant formula, nutritional products, Bank Hapoalim Bm 0.59 Foamix Pharmaceuticals Ltd (0.20) and medical diagnostic products. Perrigo’s stock price is down 9% Wix.Com Ltd 0.58 Aevi Genomic Medicine Inc (0.15) in 2017 and 17% over the last 12 months, but was up 3.6% in June Nice Ltd 0.47 Redhill Biopharma Ltd-sp Adr (0.15) 2017.

Frutarom 0.46 Alcobra Ltd (0.07) Teva Pharmaceutical is a global pharmaceutical company that Israel Discount Bank-a 0.41 Sapiens International Corp (0.07) develops, manufactures and markets generic and branded human Ltd 0.37 Compugen Ltd (0.06) pharmaceuticals and active pharmaceutical ingredients. Teva’s stock price is down 3% in 2017 and 37% over the last 12 months, but was up 19% in June 2017.

Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms

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Additions and Deletions From the BlueStar Israel Global Index and TASE-BlueStar Israel Global Technology Index in the June2017Rebalance

BlueStarIsrael Global Index TA-BlueStarIsrael Global Technology Index Following the June 2017 rebalance, the BIGI index consisted of 126 stocks Following the June 2017 rebalance, the TA-BIGITech index consisted of 71 with an aggregate market capitalization of $230 billion. There were 13 stocks with an aggregate market capitalization of $82 billion. There were additions (including two Australian-listed stocks) and three deletions 17 additions and one deletion from the index. from the index.

June 2017 Additions June 2017 Deletions June 2017 Additions June 2017 Deletions Novocure Limited Energix - Renewable Alcobra Ltd Novocure Limited Sky and Space Global Alcobra Ltd Tapticainternational Vascular Biogenics Sarine Technologies Camtek Ltd Energix - Renewable Camtek BiolineRX Ltd ADR SuperCom Ltd. Tapticainternational Vascular BiogenicsLtd Emefcy Group Arotech Corp Emefcy Group Limited Arad Ltd. Meitav Magal Security Sys EnlightRenewable Malam Team Limited Sky and Space Global Protalix. BiolineRX Ltd ADR EnlightRenewable One Software Brainstorm Cell Protalix Foresight Autonomous Arotech Corp

NotableAdditions

Taptica International is a London-listed Israeli advertising technology company offering services such as video production, application design, data management, and campaigning.

Sky and Space Global is one of the first two Australian-listed Israeli companies to join the BIGI and TA-BIGITech indexes. The company deploys nano- satellitesto provide global communication infrastructure.

ForesightAutonomous Holdingsdesigns and produces autonomous systems for vehicles including crash prevention technology

Arad Ltd. Is involved in agriculture and water technology. The company designs, manufactures, and markets next generation meters, valves and electromagnetic flow meters used by water utilities and farmers around the world.

Arotech provides defense and security products for the military, law enforcement and homeland security markets including multimedia simulation equipment and lightweight armoring.

5 BlueStar Israel 0717 Equity Review and Outlook Monthly Update TechnicalAnalysis

Strong Resistance Area

Resistance Area

Support Area

Strong Support Area

The medium-term trend in BIGI® shifted to positive in early Spring but is now approaching short-term resistance marked bythe top set of grey lines (aligned with BIGI’s 2014 highs. The index is also approaching the underside of the trend lines which served as long-term support from the bottom of the 2008/2009 financial crisis until they were broken in 2015. These lines are now likely to be major resistance. Overall, there is scope for BIGI to extend its move higher during H2 2017, but this move wouldbringitintostrongerresistanceat the 300-310level.

Support Area

Strong Support Area

TA-BIGITech® made a new all-time high in early June, confirming that its upward trend has strong momentum behind it. It corrected slightly for the remainder of June, and should at minimum test the 210 level even lower to establish toward strong support between the 190 and 200 level. We expect the secular uptrend to resume later this summer or by early Q4.

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