Bluestar-Israel-Equity-Update-2014.10

® BlueStar Israel Equity Update October 2014 This BlueStar Indexes® Monthly Update covers Israeli equities traded worldwide. We use the BlueStar Israel Global Index® (“BIGI ®” or BLS:IND on Bloomberg) as the benchmark for our review, as it represents the complete opportunity set of Israeli equity investments. Israel has one of the world’s most resilient economies and its technology sector is a global innovation leader. Yet few investors are aware of the broad global footprint of Israeli companies in other sectors. The BlueStar Israel Equity Update provides insight into the macro forces (including the geopolitical environment under which Israel’s economy operates) and the individual company investment opportunities that have contributed to Israeli Global Equities’ impressive performance over the past two decades. Fundamental Strength vs Global Crosscurrents October 6, 2014 Global equity markets experienced significant volatility in September. We believe this volatility was driven by the following factors: fears of a sooner-than-expected rise in U.S. interest rates, concern that the European Central Bank does not have the capacity to revive economic growth and inflation, mixed economic data in the U.S., a stronger dollar driving weaker Emerging Market currencies, and bearish technical indicators/patterns for major U.S. equity indexes. Readers can review our commentary on those factors in last month’s update by clicking here. Despite these global headwinds, Israeli equities performed relatively well in September. U.S. dollar strength and a slowdown in the domestic economy have resulted in a relatively sharp correction in the Shekel/Dollar exchange rate. Although the weaker shekel may eventually increase inflation, it will have a positive impact on the technology sector and other exporters. The impact can also be seen in the US dollar prices of Israeli equities as measured by indexes such as the BlueStar Israel Global Index (BIGI®) and the MSCI Israel index, which underperformed indexes priced in Shekels (e.g. TA-25 and TA-100) which reached new all-time highs during September.

We maintain a neutral outlook for Israeli Global Equities, though with an upward bias for the BIGI® over the next couple of months. Economic growth in Israel has been moderating and is expected to moderate further in the coming months, and as Israeli companies report Q3 2014 earnings, we will get a better sense of how Operation Defensive Edge impacted consumer and business spending during that period. While several medium and long term macroeconomic and industry-specific trends are expected to help extend the current bull- market in Israeli Global Equities, the BIGI® has been consolidating since Q2 2014. Given the precarious global economic situation, we do not see any major near-term (4-8 weeks) catalysts for Israeli Global Equities and as a result we prefer to maintain a neutral outlook. That said, we see loose monetary policy, an expected pick-up in government expenditures in Q4 and a weaker shekel creating an upward bias in the BIGI®. Our comments below and those accompanying our technical analysis charts provide a summary of potential catalysts that would change our view between now and the beginning of November.

There are several potentially positive or negative catalysts for Israeli Global Equities over the next few months. First is Q3 reporting for Israeli companies. While individual company earnings are not likely to send equity indexes in a specific direction, the overall tone of the earnings season and earnings forecasts could. Also, Israel’s capital markets have been influenced by monetary policy and the Shekel exchange rate with various trading partners’ currencies. Monetary policy in Israel is loosely correlated to U.S. and European monetary policy. As such, the low interest rate environment in Israel continues to support equity prices. Low interest rates in Israel, combined with expectations for a rising-rate environment in the U.S. at some point in mid-to-late 2015 are forcing a depreciation of the Shekel against the dollar. The primary cause for moderation in Israeli GDP growth in 2014 is weakness in exports, which is due in large part to the recent strength of the shekel. If the shekel can remain at roughly NIS 3.65/$1 or higher, we would expect that expectations for 2015 net exports will rise which would be positive for Israeli Global Equities. Additionally if Israel moves towards energy independence faster than expected, we expect that forecasts for the current account in 2016-2018 (roughly equal to net exports) will rise.

BlueStar Israel Global Index ® Global Equity Benchmark Comparison: Relative Performance Since 2010 September 2014 September 190 Benchmark Performance 170 BIGI® -0.90% 150 MSCI Israel 0.26% TA-100 130 S&P 500 TA-100 0.95% 110 BIGI S&P 500 -1.55% 90 MSCI EAFE -3.88% 70 MSCI EM -7.77%

Top Israeli Equity Gainers and Losers Israeli Equity Sector Attribution to BIGI® Performance Top-Performing Israeli Stocks Worst-Performing Israeli Stocks Sector September 2014 September 2014 September 2014 (As Defined by GICS) FOX WIZEL LTD 14.04% Clal Biotechnology -0.05% Health Care 0.09% SafeCharge 12.23% Elron Electronic -0.05% Industrials -0.04% VERINT SYSTEMS 10.93% Kamada -0.05% Telecom. Services -0.05% Oil Refineries Ltd 10.88% Photomedex Inc -0.03% Consumer Staples -0.07% Attunity Ltd. 9.05% Enzymotec Ltd -0.03% Energy -0.07% MELLANOX TECH 7.37% Elbit Imaging Ltd -0.04% Utilities -0.07% Shikun & Binui Ltd. 6.19% Alcobra Ltd -0.04% Consumer Discretionary -0.08% SuperCom Ltd. 5.65% Medgenics Inc -0.02% Financials -0.17% Source:Azrieli BlueStar Group Global Investors LLC;5.62% Currency -AdjustedMazor returns Robotics in dollar termsLtd. -0.04% Materials -0.20% ALLOT 5.45% Babylon Ltd. -0.01% Information Technology -0.24% September Economic Update • The Bank of Israel kept its policy benchmark rate for October at 0.25% after two consecutive months of interest rate cuts • The August CPI reading showed an decline of 0.10%, compared to an expected rise of 0.20% • The CPI over the past twelve months was 0% • The unemployment rate rose by 20bps to 6.4% while the labor market participation rate increased slightly

• The second estimate of Q2 Israeli GDP growth was revised down from 1.7% to 1.5% and the Bank of Israel lowered its 2014 GDP growth forecast from 2.9% to 2.3% while maintaining a 2015 GDP growth projection of 3.0% • The decrease in Q2 GDP growth was primarily due to a contraction of 12.2% in goods exports while service exports remained stable • Tourist entries into Israel from July-August were down 35.5% from a year prior while a sharp rebound is expected in September and October • Credit card purchase in July (most of Operation Defensive Edge) declined by 5.6% while there was no change in the consumer confidence index

• The government budget deficit in 2014-to-date is NIS 3.9 billion below the seasonal path to meeting the 2014 target

“The BlueStar Bottom Line” Our market outlook is neutral with an upward bias. Our outlook has not changed much from the previous two months when we also stated that economic growth in Israel is experiencing continued moderation and slower global trade is resulting in lower export trends. We continue to believe that Global Israeli Information Technology, Health Care, and Materials companies are poised to benefit from global growth in those industries for the foreseeable future while the trend for stocks more closely tied to the domestic economy will be uncertain for some time to come. The technical outlook for Israeli equities suggests we are at the lower bound of a consolidation range within a longer-term bull market. As local indexes are making new all-time highs, U.S. and Emerging Market equity indexes rebounded sharply off their October 2nd lows, and the initial assessments of the economic impact of Operation Defensive Edge indicate just a small and temporary slow down in tourism and consumer spending, we see a bias to the upside in Israeli Global Equities over the next few months. However, until projections for economic growth and the technical outlook are more conclusive, we maintain a neutral outlook for the BlueStar Israel Global Index.

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 security. Readers should consult with a financial professional before investing. 2 © 2014 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security

Market Trends & Technical Analysis

MT Target: 310-325

ST Support: 275-283

Strong Support Area ~9% Below MT Support: 245-255

LT Support: 195-200

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 upside resistance for Israeli Global Equities in the long-term chart of BIGI®. The highest of the two trend lines should serve as major resistance for the index in the medium-term. That line is doubly-significant, as it equates with the measured target from the 2009 lows with respect to the 2012 low. If theses trend lines are breached they will likely turn into a key support area for the index and serve as a strong base for this multi-year bull-market in Israeli Global Equities to continue onward. On the other hand, if the 275 level is broken, we would expect a sharper correction from current levels, a drop of approximately 6-9%. The short-term outlook for BIGI suggests further consolidation over the next month or two, though since the index is closer to support than resistance we think BIGI will tend to trade to the upside over that time period.

Short-Term Target: 295-298

Short-Term Support 1: 280-282 Short-Term Support 2: 273-275

Mid-Term Support: 1 255-265

Mid-Term Support: 2 240-245