BlueStar 0117 Equity Review and Outlook Monthly Update

The BlueStar Indexes® Monthly Update covers Israeli equities traded worldwide. The BlueStar Israel Global Index® (BIGI® or BLS:IND on Bloomberg) is used as the benchmark for our review as it represents the complete opportunity set of Israeli equities. BIGI® is tracked by the NYSE-listed ISRA Israel ETF, by two TASE-listed ETNs, and by an Israeli-registered mutual fund. Israel has one of the world’s most resilient economies, its technology sector is a global innovation leader, and its companies have a global footprint. The Update provides insight into macro forces, the geopolitical environment in which Israel’s economy operates, and the individual companies that have contributed to Israeli Global Equities’ impressive long-term performance.

Israeli Tech Stocks Surge, February 2017 Earnings Calendar, High-Volume Action in Pharma February 7, 2017 PerformanceReview Israeli Global Equities, as measured by BIGI®, were up 2.54% in January. BIGI® outpaced US equities in January, in-line with other Developed Market equity benchmarks, despite continued dismal performance by the two Israeli pharmaceuticals giants Teva and . Israeli pharmaceuticals stocks rallied in the first few tradingdays of the year but were subsequently hit with massive selling pressure. That selling pressure, one could argue, was definedby someof the traditionalcharacteristicsof capitulationselling. Virtually every other sectorof the Israelimarket gainedmore than4%.

Israeli Global Technology Equities, as measured by the TA-BIGITech®, benchmark started the new year off with a bang, posting a nearly 5% gain in January. This performance marked a slight outperformance compared to other predominantly Developed Market technology sector benchmarks. There was broad-based demand for Israeli Global Technology stocks as a group; with more than 60% of TA-BIGITech® constituents gaining in January. Also, large-cap and small-cap Israeli tech stocks alike, gained in January: As a group, the top-ten companies in TA-BIGITech® gained 5.4% while the sub- top-tenconstituents gained roughly4.5%.Click here for BlueStar’smonthly TechnicalAnalysisupdate.

BlueStar Israel Global Index Global Equity Benchmark Comparison: January 2017 Ten Year Relative Performance Ending January 2017 Benchmark Period Return (%) 250 BIGI 2.54 200 MSCI Israel Uncapped 0.85 150 TA-100 -1.24 100 S&P 500 1.90 50 MSCI EM 5.47 - MSCI EAFE 2.90 1/31/2007 1/31/2009 1/31/2011 1/31/2013 1/31/2015 1/31/2017 BIGI TA-100 MSCI Israel Uncapped MSCI EM MSCI EAFE

TASE-BlueStar Israel Global Technology Index Global Technology Stock Index Comparison: January 2017 Ten Year Relative Performance Ending January 2017 Benchmark Period Return (%) 250 TA-BIGITech 4.99 200 Dow Jones US Tech 4.80 150 S&P Global 1200 Info Tech 4.78 100 50 MSCI EM Tech 8.56 - TA-Tech Elite 4.73 1/31/2007 1/31/2009 1/31/2011 1/31/2013 1/31/2015 1/31/2017

TA-BIGITech S&P Global 1200 Info Tech MSCI EM Tech MSCI EAFE

www.bluestarindexes.com 1 BlueStar Israel 0117 Equity Review and Outlook Monthly Update BroadMarketTrendsandOutlook In October 2016 BlueStar developed the view that global equities were entering the next leg of the current bull market cycle (our monthly updates during Q4 2016 and January 2017 dive into this thesis and are available for review on our website). We have argued for over a year now, that a gradually rising rate environment coupled with a healthy dose of inflation is exactly what global markets need in order to extend this multi-year bull market into its final innings. The US led the world economy and markets down in 2007/2008 and it has led the world economy and markets up through the beginning of the present year.

We believe that one of the major stories for the markets in 2017 will be that the lagging developed market economies and equities will continue to follow the path carved out by the US in terms of monetary and fiscal policy as well as economic trends like growth and inflation. It follows that the equity markets in those lagging countries have a chance to outperform over the next few years: many developed markets outside the US (mainly Europe) are in a circumstance similar to where the US was just over a year ago: stillwith record low interest rates but signs of strengthening labor markets, and a revival in economic growth and inflation.

Israel’s situation is unique in the context of a broad group of developed markets because of its small sized “island economy”, and because its economy already is and has been very strong for each of the last ten-plus years. Israel, in some ways is more similar to the US than to European or Asian Developed markets. The Israeli economy grew at a fast pace of nearly 4.0% in 2016, its unemployment rate has hovered near a record low over the last 18 to 24 months while the labor force participation rate has been rising, it has enjoyed significant gains in real estate prices, and Israeli equities (with the exception of the large pharmaceuticals giants) have also been performing very well. So, like the US, we are no longer looking for a reversal from a position of economic weakness but an acceleration from an already- strong position; this can only be achieved through an acceleration of export growth and continued strength in investment in fixed capital. Additionally, Israel’s technology companies are positioned as leaders in long-term secular growth industries, and Israel has a burgeoning energy sector with high potential for export to neighboring countries.

As we stated last month: “The of Israel indicated in 2015 that it intended to follow the Federal Reserve and ECB in raising interest rates with a lag of at least one quarter. The now does not expect to raise interest rates until Q4 2017. Given this policy it seems that the upward pressure on the shekel could begin to subside somewhat in 2017 providing much-needed relief to Israeli exporters, which comprise the largest segment of the Israeli equity markets, at a time that we expect the pace of global trade to pick up. These developments increase the chances that Israeli Global Equities will resume their relative outperformance of other developed markets after two years of relative weakness. At the same time there are some potential pitfalls for the Israeli economy and market, the most prominent being signs that Israel’sreal estatemarket is slowing and the potential for increased regulation/competition in Israel’sfinancial sector. “ IsraelEconomic Update The Bank of Israel left its policy rate for February unchanged at 0.10%. Inflation in Israel was in negative territory in 2016 though the Bank of Israel notes that the inflation rate is on an upward trajectory. Structural changes in the economy such as increased competition and domestically-produced energy resources are putting pressure on inflation. At the same time, the Bank of Israel expectation to raise rates toward the end of 2017, and a pick up in global inflation coupled with strength in the local labor market lead us to believe that it is only a matter of time before Israel is pulled out of the current deflationary environment.

Israel’s economic output is projected to have grown 3.8% in 2016. Notable contributors to the strong growth include: an increase in private consumption of 6% and fixed capitalinvestment of 10%. Disappointingly, exports grew a mere 1.4% which makes it the component of GDP in the best position for a turn around in 2017.

Top Israeli Equity Gainers and Losers: February 2017 Israeli Equity Sector Performance February 2017 Top-Performing Israeli Stocks (%) Bottom-Performing Israeli Stocks (%) GICS Sector Return (%) Ceragon Networks Ltd 36.20 Alcobra Ltd -50.00 Industrials 27.36 Kornit Digital Ltd 35.62 Inc -22.38 Consumer Discretionary 22.33 Telecommunication Services 15.17 Israel Ltd 23.48 Dsp Group Inc -16.86 Real Estate 9.58 Ltd 21.84 Silicom Ltd -10.90 Materials 8.42 Enzymotec Ltd 20.78 Foamix Pharmaceuticals Ltd -9.37 Information Technology 7.31 Electra Consumer Products 19 19.69 Teva Pharmaceutical Ind Ltd -9.09 Utilities 5.25 Partner Communications Co 13.91 Perrigo Co Plc -8.51 Consumer Staples 4.14 Discount Investment Corp-reg 13.49 The Israeli Telecom Co -8.41 Financials 3.63 Stratasys Ltd 12.98 Aevi Genomic Medicine Inc -8.11 Energy 1.13 Wix.Com Ltd 12.11 Us Holdings Inc -6.94 Health Care -2.73 Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms www.bluestarindexes.com 2 BlueStar Israel 0117 Equity Review and Outlook Monthly Update IsraelEconomicUpdateandEconomicExposure IndexTrends This section discusses Israel’s equity market in terms of sectors and our economic exposure indexes (IDEI – domestic exposure index, and IGEI – global exposure index). For more information on these indexes please download theindex fact sheets from our website.

Over the past several months we articulated that Israeli equities with predominantly global sources of revenue are likely to begin outperforming those with predominantly domestic sources of revenue in the near future; the rationale for this view is summed up in the bullet points below. Israeli globally-oriented companies outperformed Israeli domestic-oriented companies for the first time in quite a while in December 2016. Despite the continued selling pressure in major global companies Teva and Perrigo, the IGEI underperformed by just 50 bps in January leading us to believe that the broader IGEI index is showing very serious relative strength confirming our thesis for the second month in a row. Additionally, the chart below titled “IEEI Performance Relative…Since 2009” shows that the IDEI’s relative performance against the broader BIGI benchmark ended January virtually at/within 5% of its resistance point.

• Healthcarehas underperformed by too much for too long • Materials andchemicals exporters are likely to seegreater demandand the paceof global tradepicks up • Israeli Global Technology stocks are experiencing a period of relative strength and are not yet in overbought territory • The Bank of Israel is likely totrail theFederal Reserve and ECB in raising its policy interest rate which should alleviate some of the upwardpressure on theShekel • The paceof increase in Israel’s real estatemarket is slowing • IDEI outperformance is likely exhausting momentum: the IDEI has not outperformed the IGEI by margins much wider than we have seen over the last twelve months before the IGEI begins tooutperform

Trailing Twelve Month Comparative Total Returns IEEI Relative Performance Since 2009 170 140 130 150

120 130 110 110 100 90 90 80 70 1/31/2016 4/30/2016 7/31/2016 10/31/2016 1/31/2017

Israel Domestic Exposure Israel Global Exposure Israel Domestic Relative to Israel Global

IEEI Performance Relative to Israel Total Investable Market Index Since 2009 150 140 130 120

110 100 90 80 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Israel Domestic Exposure Israel Global Exposure Israel Total Investable Market

www.bluestarindexes.com 3 BlueStar Israel 0117 Equity Review and Outlook Monthly Update What to Watch For in 2017 In case you missed it last month… 1. Israel’s energy sector is expected to see massive capital investment and expansion from 2018 into the next decade: Investors will be looking for opportunities to increase exposure to this sector in 2017. Keep an eye on DelekEnergy and Oil Refineries 2. Israeli exporters, which are best measured by the Solative-BlueStarIsrael Global Exposure Index, is likely to begin outperforming: A stable shekel and potential pick-up in global trade should boost Israeli companies that rely on revenue from outside of Israel. Israeli pharmaceuticalsgiants Teva and Perrigo will be crucial for Israeli equities in 2017. Also keep an eye on firms like , , Delta Galil, and Israel Chemicals. 3. The prospect of higher interest rates could have a negative impact on consumer sentiment in Israel’s residential real estate sector which may have adverse consequences for Israel’s financial stocks 4. Watch for signs that the Bank of Israel is following the Federal Reserve and ECB in raising interest rates. The longer the lag the better off Israeli exporters will be.

February 2017 Earnings Schedule

Weight Weight in TA- Weight Weight in TA- Company Date Company Date in BIGI BIGITech in BIGI BIGITech

CEVA Inc. 0.52% 1.30% Feb. 1 Tower Semi 1.32% 3.32% Feb. 13

Amdocs 5.59% 9.40% Feb. 1 Radcom 0.19% 0.46% Feb. 14

Mellanox 1.37% 3.22% Feb. 1 Gilat Satellite 0.21% 0.52% Feb. 14

Attunity 0.15% 0.36% Feb. 2 Israel Chemicals 1.43% n/a Feb. 15

DSP Group 0.21% 0.52% Feb. 2 Ceragon Networks 0.28% 0.69% Feb. 15

Allot 0.18% 0.45% Feb. 7 Syneron Medical 0.29% 0.74% Feb. 15

Plus500 0.44% 0.75% Feb. 7 Wix.com 1.13% 2.81% Feb. 15

Radware 0.43% 1.07% Feb. 8 SodaStream Int’l 0.62% n/a Feb. 15

Caesarstone 0.52% n/a Feb. 8 Compugen 0.21% 0.53% Feb. 15

Orbotech 1.07% 2.59% Feb. 8 Location 0.44% 1.10% Feb. 27

Liveperson 0.31% 0.79% Feb. 8 Ormat Tech 1.42% 3.61% Feb. 28

Imperva 0.92% 2.15% Feb. 8 3.98% n/a Feb. 28

Varonis Systems 0.40% 0.90% Feb. 8 3.68% n/a Feb. 28

Taro Pharma. 0.94% n/a Feb. 9 Israel Discount 1.50% n/a Feb. 28

CyberArk Software 1.07% 2.42% Feb. 9

Bold indicates greater than 1.5% weight in BIGI and/or TA-BIGITech

© 2017 BlueStar Global Investors, LLC 4 BlueStar Israel 0117 Equity Review and Outlook Monthly Update Sector/CompanySpotlight We continue to monitor the performance of the global Health Care sector and the two largest Israeli Health Care companies relative to their respective broader market indexes. The relative underperformance since mid-2015 has been very unusual from statistical and technical perspectives. The global Healthcare sector has underperformed global equities for three of the last four quarters by 5% or more in each of those quarters, and under-performed again in the month of January. Perrigo and Teva underperformed BIGI more often and by a wider margin; something thathas not occurred once in thesix years prior.

While we concede to being a bit early on expecting a reversal in Teva and Perrigo, we continue to believe, at least from a technical perspective, that a reversal is drawing near. Aside from the expected mean-reversion effect as illustrated in the charts below, we saw what was quite possibly capitulation selling in both Teva and Perrigo on or around January 9, as highlighted on the charts on the following page. Around January 9th there was unusually high volume selling in both stocks and momentum continued to drive both stocks lower, but on lower volume, over much of the remainder of January. On January 23rd, there was unusually high-volume buying in Perrigo, and on February 1st there was unusually high volume buying in Teva, likely marking a bottom in both stocks.

The risk to our technical analysis here is that the industry is undergoing a structural change in its economic model. Uncertainty over the regulatory environment in the pharmaceuticals industry could cause investors to assign a higher discount rate to thesector while expected declines in gross margins could impact profitability. The confluence of these forces could lead to both lower earnings and lower multiples. On the other hand, Perrigo’s stock has already declined by roughly 75% over the last two years and Teva has already declined by roughly 50%. Such declines have caused Perrigo’s dividend yield totriple and Teva’s to nearly double.

In sum, we feel that it will be difficult for the sector as a whole to fully recover its losses from the past 24 months but for now, much of the foreseeable macro risks to the sector are likely priced into the market. Also the price and volume action over the last month, combined with attractive dividend yields in a still low-rate environment ,has likely put a floor on these stock’s prices. While some may view the sector as “just too risky” we view recent price action as boding well for Israeli Global Equities as a group since Teva and Perrigo make up roughly 20% of themarket cap. Global Health Care Care Sector Quarterly Performance Relative to Global Equities Since 2009 10.00%

5.00%

0.00%

-5.00%

-10.00%

-15.00% Q1 2009 Q1 2017 TEVA Quarterly Performance Relative to BIGI PRGO Quarterly Performance Relative to BIGI 30.00% 40.00% 30.00% 20.00% 20.00% 10.00% 10.00%

0.00% 0.00% -10.00% -10.00% -20.00% -20.00% -30.00% -40.00% -30.00%

© 2017 BlueStar Global Investors, LLC 5 BlueStar Israel 0117 Equity Review and Outlook Monthly Update Sector/CompanySpotlight

Teva Pharmaceuticals Three-Month, Hourly Interval Price and Volume Chart

Perrigo Co. Three-Month, Hourly Interval Price and Volume Chart

© 2017 BlueStar Global Investors, LLC 6 BlueStar Israel 0117 Equity Review and Outlook Monthly Update Sector/CompanySpotlight

Teva Pharmaceuticals Two-Year, Daily Interval Price and Volume Chart

Perrigo Co. Two-Year, Daily Interval Price and Volume Chart

Contact Us Disclaimer BlueStar Indexes The opinions expressed in this report are those of BlueStar Global Investors, LLC and should not be interpreted as a recommendation to buy or sell any 1350 Avenue of the Americas, 4th Floor security. Readers should consult with a financial professional before investing. New York, NY 10019 [email protected] BlueStar Indexes licenses its indexes as the basis of investment funds globally including the NYSE-listed ISRA ETF and the Nasdaq-listed ITEQ ETF for a fee based on the level of assets in those funds. Additionally, a majority-owned affiliate of BlueStar Indexes, ITEQ ETF Partners, is the sponsor of the © 2017 BlueStar Global Investors, LLC Nasdaq-Listed ITEQ ETF which tracks the TA-BIGITech index and earns fee based revenue based on the level of assets in the ITEQ ETF. 7