Bluestar Israel Equity Update Third Quarter 2014 Q2 2014 in Review & Q3 2014 Outlook

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BlueStar Israel Equity Update Third Quarter 2014 Q2 2014 in Review & Q3 2014 Outlook

What’s Inside  Major Emerging and Developed Market stock indexes rose in Q2 2014. The S&P 500 index gained 4.69% while the MSCI EAFE and Emerging Market Indexes were up 1.74% and 5.13%, respectively Israeli Global 1.  The BlueStar Israel Global Index (“BIGI”) declined 2.08% in Q2 after rising by over Equities in Q2 6% during the Q1 2014 2014  Most major global equity benchmarks sold off in early/mid April and then recovered sharply throughout the rest of the quarter. Israeli equities did not recover in line with its Developed Market peers on account of moderation in economic growth forecasts for ® 2.-4. About the BIGI this and next year, and heightened geopolitical risks Index  The BlueStar Israel Global Index and the BlueStar Israel Global Technology Index (“BIGITech”) underwent their semi-annual rebalance and reconstitution. As a result of 5. Technical Analysis increased IPO activity during the first and second quarters of 2014, BIGI added a net of 12 new constituents and BIGITech added a net of four new constituents

6. About the Israeli Global Health Care stocks were the only sector to post gains in Q2, largely on BIGITech Index account of Teva and Taro Pharmaceuticals whose shares rose by 2.5% and 26%, respectively

7. Israeli Capital The poorest performing sector within the Israeli Global Equities universe was the Markets Update Consumer Discretionary sector which declined by 46 basis points in Q2. Shares of SodaStream and Fox led this sector on the downside, decreasing by 23% and 18%, respectively 8. Israeli Economic Review & Outlook Q3 2014 began with a rally which quickly gave way to geopolitical concerns as the Israeli Defense Forces battles Hamas in Gaza in order to put an end to the threat of rocket fire from the Gaza Strip. Additional stock market volatility resulted from a U.S. 9. Geopolitical Federal Reserve report that suggested overvaluation in some sectors of the U.S. equity Environment market.

 Initial Q2 corporate results have been generally strong, as has U.S. economic data. We expect economics and fundamentals to take over the spotlight as we move into the end of July and the rest of Q3.

BIGI® Performance (BlueStar Israel Global Index, Jan. 2010- Jun. 2014) 190

170

150

130 TA-100 S&P 500 110 BIGI 90

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 Sector BIGI® TA-25 TA-100 Q2 2014 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1 EIS Israel Information Technology 30.8% 6.1% 1.6% 4.5% 8.1% ACWI 5.23% 23.58% 10.85% 14.88% 8.02% 4.88% 8.29% Health Care 29.9% 25.1% 27.9% 24.8% 26.0% EAFE 4.34% 24.09% 8.59% 12.27% 7.42% 5.03% 7.27% Financials 19.0% 36.6% 10.0% 31.9% 31.5% MSCI EM 6.71% 14.68% -0.06% 9.58% 12.30% 9.21% 8.34% Materials 5.4% 10.4% 3.3% 8.8% 7.3% Energy 4.5% 5.6% 2.0% 14.8% 12.0% S&P 500 5.23% 24.61% 16.58% 18.83% 7.78% 4.35% 9.35% Telecom. Services 3.4% 7.3% 2.7% 9.7% 7.1% MSCI Israel 2.41% 32.52% 0.74% 4.61% 6.47% 6.87% 6.39% Industrials 2.7% 5.0% 1.3% 2.8% 4.2% TA-100 -0.58% 24.16% 3.88% 12.32% 10.67% 8.83% 7.89% Consumer Discretionary 2.0% 0.6% 0.2% 0.0% 1.3% TA-25 0.78% 23.81% 4.15% 12.97% 12.56% 9.58% 8.19% Consumer Staples 1.8% 3.4% 1.0% 2.8% 2.6%

Utilities 0.5% 0.0% 0.0% 0.0% 0.0% BlueStar -1.60% 25.95% 5.41% 13.64% 11.45% - - Source: BlueStar Global Investors LLC *Annualized Jun. 30, 2014 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Jun. 30, 2014 Comparative Risk (Standard Deviation of Returns)* Five Year Correlations MSCI Q2 2014 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1 ACWI MSCI EM EAFE S&P 500 TA-100 TA-25 Israel ACWI 2.19% 9.69% 14.26% 14.99% 16.61% 16.40% 15.41% ACWI 1.00 EAFE 1.35% 11.02% 16.30% 17.00% 18.25% 17.54% 16.69% MSCI EM 0.90 1.00 MSCI EM 5.65% 12.34% 19.49% 19.16% 23.77% 23.14% 23.45% EAFE 0.97 0.86 1.00 S&P 500 2.98% 9.47% 12.26% 13.40% 14.70% 15.39% 14.79% S&P 500 0.96 0.81 0.89 1.00 MSCI Israel 9.06% 11.43% 19.40% 18.85% 18.89% 24.18% 23.65% MSCI Israel 0.69 0.71 0.63 0.66 1.00 TA-100 4.64% 11.69% 16.79% 18.53% 21.56% 23.97% 24.14% TA-100 0.78 0.79 0.75 0.73 0.86 1.00 TA-25 3.33% 13.63% 17.44% 19.03% 21.78% 24.25% 24.20% TA-25 0.78 0.80 0.74 0.72 0.84 0.99 1.00

BlueStar 10.47% 10.68% 16.86% 18.27% 19.94% - - BlueStar 0.82 0.80 0.78 0.77 0.87 0.97 0.95 *Annualized 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Jun. 30, 2014 Source: BlueStar Global Investors LLC Jun. 30, 2014

Index Weight as Index Weight as Company Name Ticker Exchange Company Name Ticker Exchange of June. 30, 2014 of Jun. 30, 2014 1 Teva Pharmaceutical Industries TEVA IT 12.63% 58 Mazor Robotics Ltd. MZOR IT 0.35% 2 Perrigo Company plc PRGO UN 11.23% 59 Syneron Medical Ltd ELOS UQ 0.35% 3 Check Point Software (US) CHKP UQ 6.07% 60 Rami Levi Chain Stores. RMLI IT 0.35% 4 Amdocs Ltd DOX UQ 4.74% 61 Ceva Inc CEVA UQ 0.35% 5 Bank Hapoalim BM Reg POLI IT 3.84% 62 Nova Measuring Instruments NVMI IT 0.35% 6 Bank Leumi Le-Israel BM LUMI IT 3.45% 63 Menorah Insurance Co Ltd 1 MMHD IT 0.32% 7 Stratasys Ltd SSYS UQ 3.09% 64 888 Holdings Plc 888 LN 0.32% 8 VeriFone Systems Inc PAY UN 2.46% 65 Oil Refineries Ltd ORL IT 0.32% 9 Israel Chemical Corp ICL IT 2.44% 66 Alon Usa Energy ALJ UN 0.32% 10 BEZEQ ISRAELI TELECOM CORP BEZQ IT 2.37% 67 Telit Communications Plc TCM LN 0.32% 11 VERINT SYSTEMS VRNT UQ 1.67% 68 Naphtha Israel Petroleum NFTA IT 0.30% 12 Nice Systems Ltd NICE IT 1.64% 69 Audiocodes Ltd AUDC UQ 0.30% 13 Israel Corp ILCO IT 1.44% 70 Electra (Israel) ELTR IT 0.30% 14 Playtech PTEC LN 1.35% 71 Delta-Galil Industries DELT IT 0.30% 15 Taro Pharmaceutical Industries TARO UN 1.27% 72 Shufersal Ltd. SAE IT 0.29% 16 Delek Group Ltd DLEKG IT 1.24% 73 Varonis Systems Inc VRNS UQ 0.29% 17 Opko Health Inc OPK UN 1.19% 74 Africa Israel Properties AFPR IT 0.29% 18 Mizrahi Tefahot Bank Ltd MZTF IT 1.18% 75 Clicksoftware Technologies CKSW UQ 0.29% 19 Israel Discount Bank 0.1 DSCT IT 1.09% 76 Africa-Israel Inv Ltd AFIL IT 0.28% 20 Delek US Holdings DK UN 1.08% 77 Silicom Limited SILC UQ 0.28% 21 Elbit Systems Ltd ESLT IT 1.01% 78 Israel Phoenix Assurance 1 PHOE1 IT 0.28% 22 MELLANOX TECH MLNX UQ 0.90% 79 Perion Network Ltd PERI UQ 0.27% 23 Caesar Stone Sdot Yam Ltd CSTE UQ 0.83% 80 Matrix MTRX IT 0.27% 24 Paz Oil Company Ltd PZOL IT 0.76% 81 Formula Systems (1985) Ltd FORT IT 0.27% 25 Gazit Globe 1982 Ltd GZT IT 0.75% 82 DSP Group DSPG UQ 0.26% 26 Azrieli Group AZRG IT 0.74% 83 FIBI Hldgs FIBI IT 0.26% 27 Frutarom FRUT IT 0.72% 84 Discount Investment Corp DISI IT 0.26% 28 Osem Investment OSEM IT 0.60% 85 SafeCharge International SCH LN 0.26% 29 Ezchip Semiconduct EZCH IT 0.60% 86 Bayside LandCorp 1 BYSD IT 0.26% 30 Strauss Group STRS IT 0.58% 87 Mivtach Shamir Hldgs Ltd MISH IT 0.26% 31 Wix.com Ltd WIX UQ 0.56% 88 Magic Software Enterprises MGIC IT 0.26% 32 Radware Ltd RDWR UQ 0.54% 89 PLURISTEM THERAP PSTI UQ 0.26% 33 Harel Insurance Inv Ltd 1 HARL IT 0.53% 90 Sapiens Intl Corp SPNS UQ 0.26% 34 Cellcom Israel Ltd. CEL IT 0.53% 91 Photomedex Inc PHMD UQ 0.26% 35 Partner Communications Co Ltd PTNR IT 0.53% 92 Kamada KMDA IT 0.24% 36 SodaStream International Ltd SODA UQ 0.51% 93 Jerusalem Economic Corp ECJM IT 0.24% 37 Imperva Inc IMPV UN 0.50% 94 FOX WIZEL LTD FOX IT 0.24% 38 Aloni Hetz Properties ALHE IT 0.49% 95 Enzymotec Ltd ENZY UQ 0.24% 39 Orbotech Ltd (US) ORBK UQ 0.47% 96 Plasson Industries Ltd. PLSN IT 0.23% 40 Migdal Insurance Hdlgs MGDL IT 0.47% 97 Al-Rov (Israel) Ltd ALRO IT 0.23% 41 Ormat Technologies ORA UN 0.47% 98 Brainsway Ltd. BRIN IT 0.22% 42 LivePerson Inc LPSN UQ 0.47% 99 Medgenics Inc MDGN UA 0.22% 43 Shikun & Binui Ltd. SKBN IT 0.45% 100 Industrial Building Corp IBLD IT 0.22% 44 Clal Insurance Enterprises Hldgs CLIS IT 0.45% 101 Clal Biotechnology Industrie CBI IT 0.22% 45 Delek Energy Systems Ltd DLEN IT 0.44% 102 Ceragon Networks [US CRNT UQ 0.22% 46 Ormat Industries ORMT IT 0.44% 103 Elron Electronic Indust ELRN IT 0.22% 47 Plus500 Ltd PLUS LN 0.44% 104 Elbit Imaging Ltd EMIT IT 0.22% 48 Compugen Ltd CGEN UQ 0.41% 105 Borderfree Inc BRDR UQ 0.22% 49 First Intl Bank of Israel FTIN IT 0.40% 106 SuperCom Ltd. SPCB UQ 0.22% 50 Delek Automotive Systems Ltd DLEA IT 0.39% 107 Big Shopping Centers Ltd. BIG IT 0.21% 51 Jerusalem Oil Exploration JOEL IT 0.38% 108 Meitav DS Investments Ltd MTDS IT 0.21% 52 MELISRON Ltd. MLSR IT 0.37% 109 Elco Hldgs ELCO IT 0.21% 53 NITSBA Hldgs (1995) Ltd NTBA IT 0.37% 110 Attunity Ltd. ATTU UQ 0.20% 54 ALLOT COMMUNICATIONS LTD ALLT UQ 0.36% 111 Property & Building Corp PTBL IT 0.20% 55 Evogene Ltd. EVGN IT 0.36% 112 Alcobra Ltd ADHD UQ 0.20% 56 AMOT Investment Ltd AMOT IT 0.36% 113 Babylon Ltd. BBYL IT 0.19% 57 Ituran Location & Control Ltd ITRN IT 0.36% 114 Lumenis Ltd. LMNS UQ 0.18%

3 © 2014 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security BlueStar Israel Global Index Q2 2014 Performance Attribution and Differentiators BIGI® Internal Characteristics Attribution Currency Attribution Exchange-Related Attribution

Total Index Local Attribution of Attribution of Weight Listed Currency Currency Total Index Category to on Local Performance Performance Weight as of BIGI® Exchange(s) vs USD (Q2 to BIGI® Jun. 30, 2014 Performance (Q2 Jun. 30, 2014 2014) Performance 2014)

Israel – New Israeli Shekel Dual-Listed 56.43% 1.41% 0.80% 35.30% -0.63% (TASE) Constituents

US - US Dollar Constituents With 41.24% 0.00% 0.00% 31.49% -0.17% (NYSE, NASDAQ, AMEX) No TASE Listing UK – GB Pound 2.04% 2.34% 0.04% Technology (London) Constituents With 25.06% -0.05% No TASE Listing Poland – Polish Zolty 0.00% 1.00% 0.00% (Warsaw)

Total Direct Effect of Currency Fluctuation on - - 0.84% BIGI® Price Level BlueStar Israel Global Index Constituent Attribution vs Peers

BIGI® Weight BIGI® Weight Q2 2014 Q2 2014 Positive Relative to MSCI Relative to MSCI Negative Company Name Relative Weight Company Name Israel Capped Israel Capped Relative Weight Attribution Index Index Attribution

Taro Pharmaceutical 1.27% 0.34% Perrigo Company plc 11.23% -0.65% Stratasys Ltd 3.09% 0.22% Teva Pharmaceutical -12.54% -0.32% VeriFone Systems Inc 2.46% 0.21% Imperva Inc 0.50% -0.26% Nice Systems Ltd -2.27% 0.17% BEZEQ -2.56% -0.14% Israel Discount Bank 0.1 -1.50% 0.11% SodaStream 0.51% -0.12% Mizrahi Tefahot Bank -1.72% 0.09% MELLANOX TECH 0.90% -0.10% Partner -0.58% 0.08% Plus500 Ltd 0.44% -0.09% VERINT SYSTEMS 1.67% 0.08% Bank Hapoalim BM Reg -6.26% -0.09% Israel Chemical Corp -3.73% 0.07% Silicom Limited 0.28% -0.09% Cellcom Israel Ltd. -0.53% 0.06% Playtech 1.35% -0.09%

BlueStar Israel Global Index Sector Performance Attribution Q2 2014 Q1 2014 Performance Q4 2013 Performance Q3 2013 Performance Q2 2013 Performance GICS Sector Performance Attribution Attribution Attribution Attribution Attribution Health Care 0.07% -0.36% 0.67% 0.41% -0.85% Info. Technology -0.09% 0.51% 2.32% 2.06% -0.13% Financials -0.15% 0.24% -0.10% -0.35% -1.47% Materials -0.15% -0.09% 0.09% -0.16% 0.02% Industrials -0.16% 0.09% 0.87% 0.62% -0.03% Telecom Services -0.17% -0.04% 1.37% 1.11% -0.07% Utilities -0.17% -0.15% 0.35% 0.10% 0.25% Consumer Staples -0.34% -0.38% -0.11% -0.10% 0.62% Energy -0.46% 1.66% 3.34% 3.08% 0.10% Consumer Disc. -0.46% 4.97% 1.39% 1.14% -0.09%

MT Target: 310-325

ST Support: 275-280

Strong Support Area ~12% 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 short- to 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, which we suspect they will be over the medium 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 in Israeli Global Equities to continue onward. For the short-term we expect BIGI® to at least touch the all-time high made late last year near 295, if not surpass it and reach the 300-305 area.

Short-Term Target: 295 Short-Term Support 1: 280 Short-Term Support 2: 275

Mid-Term Support: 1 255-265

Mid-Term Support: 2 240-245

5 © 2014 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security About the BlueStar Israel Global Technology Index (BIGI®Tech) 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. BIGI®Tech 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 BIGI®Tech 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 Group Weight Preliminary Index Statistics Software 30.38% No. of Securities 53 I.T. Services 19.76% Computers & Peripherals 10.33% Currency USD Semiconductors 8.48% Max. Security Weighting 10.33% Communications Equipment 5.88% Internet Software & Services 4.49% Concentration Ratio 60.33% Biotechnology 4.31% Health Care Equipment 3.85% Annualized 5 Year Performance 16.51% Aerospace & Defense 3.29% Dividend Yield n/a Electronic Equipment 1.45% Electric Utilities 1.44% Jun. 30, 2014 Diversified Financials Services 1.35% Electrical Equipment 1.33% Primary Listing of Constituents Life Sciences Tools & Services 1.23% New York (NYSE/NQ) US Dollar 69.63% Diversified Telecom. Services 0.99% Hotels, Restaurants & Leisure 0.93% Tel Aviv (TASE) Israeli Shekel 22.02% Pharmeceuticals 0.53% Jun. 30, 2014 London (LSE) British Pound 8.36%

Jun. 30, 2014

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 half of 2014, several initiatives involving foreign companies or governments were launched, including:

.Asia is expected to overtake the U.S. as Israel’s second-largest export destination in 2014 .Israel opened new trade attaché offices in Asia, Africa, and South America .Chinese firm, PMEC, won the Ashdod port tender .Israel Aircraft Industries (“IAI”) is bidding against Boeing and Airbus for four South Korean refueling aircraft .Tower Semiconductor opened a Japanese office .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.

IPO Pipeline and Capital Markets

TASE Equity and Convertibles Market Vitals at Jun. 30, 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 and Q1 2014 came to an end Number of Listed Market Cap (USD) Turnover (USD Companies Mar. 31, 2014/Dec. in the second quarter. This is likely due to seasonal trading patterns, but also mm) 2014 2014/2013 31, 2013 to more stagnant economic progress and a lack of catalysts for the local YTD/2013 market during the second quarter. 485/508 218.0/203.3 Billion 346/324

While the overall trend in trading volume is quite positive, regulators and Number of Public New Capital exchange officials are still exploring ways to induce more listings and liquidity Issues 2014 Raised (USD) 2014 YTD/2013 YTD/2013 on the TASE and to attract some of Israel’s most exciting private companies to chose the TASE over an international exchange such as the London Stock 38/95 1.41/ 2.13 billion Exchange or the NYSE for their IPO. So far they have been unsuccessful. There have been only 38 IPOs on the TASE in the first half of this year compared to 95 for the full year in 2013. Additionally there have been a net 23 delistings on the TASE. In contrast we highlight IPOs by Israeli companies on foreign exchanges which have occurred in the first half of 2014 or that are expected to occur over the next 12 months.

The companies added to BIGI in the June 2014 rebalance as a result of their IPO this year include SuperCom, Lumenis, Borderfree, Varonis, SafeCharge and Enzymotec. Over 20 Israeli companies are expected to list on a foreign exchange over the next 12 months, including Outbrain, Matomy, Mobileye , Marimedia, Adama and Cyberark.

Israeli Q1 2014 GDP growth was revised sharply higher during the second quarter compared to initial estimates, even though the overall economic outlook is quite mixed. GDP grew 2.9% on an annualized basis in Q1 compared to the 2.1% reported in the first estimate by the Central Bureau of Statistics. While there has been a sharp decline in the investment expenditure category of GDP, personal consumption and net export figures have improved or stabilized.

Business sector output increased by 1.5% compared to the initial estimate of 0.40% and private consumption declined by just 0.60% compared to the initial estimate of a decline of 2.0%. Foreign trade data were mixed though skewed Source: OECD towards the positive in Q1 2014. While goods exports remained flat (which is * Estimates as of Nov. 2013 in-line with global trade data), there was a slight improvement in high-tech exports. Finally, goods imports increased by 2% in May led by the imports of Shekel/Dollar consumer goods and raw materials indicating economic strength and an anticipated pick-up in high-tech exports and domestic consumption over the next few quarters. On balance, the current account was in surplus for the first quarter.

Fiscal Policy and the Labor Market

During the first half of 2014 the government’s budget surplus was NIS 1.9 Shekel Strength billion which is NIS 3.3 billion above the seasonal path towards achieving the budget deficit target for 2014. Government expenditures increased 3.5% compared to the first half of 2013. The improvements in the unemployment and participation rates came to a halt in Q2. Jan. 1, 2010 - Jun. 30, 2014 Inflation and Monetary Policy Shekel/Euro The Bank of Israel kept its policy interest rate at 0.75% throughout Q2 due to mixed economic data, relatively low inflation and inflation expectations, and a strengthening domestic currency.

The CPI over the twelve month period ending May 2014 increased by 1.0% which is at the lower bound of the target inflation range. The CPI is expected to increase by 1.4% over the next 12 months which is below the mid point of the target inflation range. The housing component of the CPI increased by

2.3% in the twelve month period ending May 20414 Shekel Strength

New Israeli Shekel Performance

Jan. 1, 2010 - Jun. 30, 2014 The Shekel strengthened by 1.41% against the U.S. dollar and by 2.40% against the Euro in Q2. While the U.S. is still the second largest export market for Israel Non-Government Bond Index Israeli goods and services, it is expected that Southeast Asia will replace the (January 2010 – June 2014) U.S. for the number two spot sometime in 2014. The strengthening of the Shekel makes Israeli exports less price competitive. At the same time it allows for an increased standard of living for Israelis who now have a more valuable currency at their disposal for purchases of higher ticket items and imports. The relatively strong fiscal position of the government (as compared to other Developed Market governments and the Israeli fiscal position over the past few years), the relatively strong Israeli economy (as compared to other Developed Market economies), and the recent natural gas discoveries are all continuing to exert upward pressure on the shekel against the currencies of most of Israel’s major trading partners.

Recent events in both Israel/Gaza and in Ukraine are proving once again that Israeli Global Equities are generally influenced to a greater degree by global economic events and market trends than they are by local geopolitical events. We have once again seen that Israeli Global Equities generally sell-off sharply at the onset of a geopolitical threat or military operation before recovering or “resetting” to move in-line with global economic and market trends.

At the onset of Operation Defensive Edge, Israeli Global Equities dropped by approximately 1.75% before recovering by approximately 1.00% off July’s lows. The major risks in investing in markets whose military and population are affected by geopolitical events is that it is impossible to gauge when the geopolitical event will cease and what the economic toll will be until it is finally over. While it is discouraging to see Israeli reservists being called up and Israeli troops being deployed into the Gaza Strip, the Israeli equity market has shown remarkable resilience indicating that local investors (who arguably know best what is happening from a geopolitical perspective) are not selling equities in a panic, rather they are providing strong support to the local market.

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