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BlueStar Israel Equity Update Second Quarter 2013

Q1 2013 in Review & 2013 Outlook

What’s Inside  Global developed market equities gained in Q1 continuing 2012’s market rally.

 The BlueStar Israel Global Index (BIGI) started 2013 off with a first quarter gain of 7.61% , underperforming the S&P 500, which gained 10.61% and hit record highs in late March and early April. Israeli Global Equities did outperform other 1. The developed market equities as the ACWI and EAFE indexes gained 6.61 and BlueStar 5.25%, respectively. Emerging markets as measured by the MSCI EM Index lost 1.79%. Israel Global Index in Q1  Israel’s financial and oil & gas sectors continued to be among the leading Israeli Global Equities for the third consecutive quarter, but Israel’s health care stocks 2013 were the greatest gainers in Q1 2013.

 Many companies have chosen to delist from the Tel Aviv Stock Exchange in 2-4. About the response to “over regulation”; volume on the local exchange continues to be BlueStar Israel problematic. However, asset flows into Israeli mutual funds by both Israelis and foreigners picked up significantly in the first quarter of 2013. Global Index and  Rocket attacks from Gaza resumed in Q1 and early Q2 2013 after a truce was reached following “Operation Pillar of Defense” in late 2012. Prime Minister Risk/Return Netanyahu and Turkish Prime Minister Erdogan made great strides in reviving the Data two regional powers’ alliance. There were no major breakthroughs in efforts to halt Iranian nuclear enrichment. Kim Jong Un of North Korea threatened to attack South Korean and U.S. targets with nuclear weapons. 5-8. Technical Analysis BIGI Performance 9. Israeli (BlueStar Israel Global Index, Jan 2010- March 2013) Sector 150 Highlights 140 130 10. Capital 120 Markets 110

100 11. Israeli Economic 90 Review 80 70 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 12. Geopolitical 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2013

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 Comparative Risk MSCI - FTSE Sector BIGI TA-25 TA-100 Q1 '13 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Incept 1 EIS Israel Technology 25.9% 9.0% 6.4% 10.8% 9.8% ACWI 8.03% 12.52% 16.93% 21.35% 16.77% 17.00% 15.70% Health Care 24.4% 22.9% 48.2% 20.1% 23.1% EAFE 11.07% 15.95% 19.29% 23.22% 18.37% 17.94% 16.95% Financials 18.6% 32.2% 22.8% 29.6% 29.7% MSCI EM 6.06% 15.29% 21.12% 28.20% 24.08% 25.38% 23.96% Oil & Gas 9.3% 5.3% 2.1% 13.3% 10.7% S&P 500 6.69% 10.39% 15.01% 18.92% 14.82% 16.17% 15.07% Basic Materials 8.0% 14.9% 10.7% 12.9% 11.4% MSCI 6.02% 16.83% 20.86% 21.97% 19.89% 24.54% 24.20% Industrials 3.9% 3.8% 2.0% 2.4% 3.8% Israel Consumer Services 3.7% 1.1% 0.7% 0.0% 2.1% TA-100 7.28% 15.92% 20.50% 25.85% 23.01% 24.81% 24.73% Telecommunications 3.4% 6.8% 5.0% 8.8% 6.3% TA-25 7.96% 16.64% 20.88% 25.67% 23.18% 25.04% 24.74% Consumer Goods 2.0% 3.5% 1.7% 2.3% 2.7% BlueStar 0.58% 14.53% 20.54% 24.69% 21.69% Utilities 0.9% 0.6% 0.4% 0.0% 0.5% - -

Source: BlueStar Global Investors LLC *Annualized Mar 31 2012 Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Mar 31 2012 Long- Term Returns Five Year Correlations MSCI Q1 '13 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Incept 1 ACWI MSCI EM EAFE S&P 500 TA-100 TA-25 Israel ACWI 6.61% 11.16% 8.34% 2.63% 9.92% 4.55% 8.01% ACWI 1.00 EAFE 5.25% 11.81% 5.50% -0.39% 10.19% 4.19% 6.90% MSCI EM 094 1.00 MSCI EM -1.79% 2.09% 3.51% 1.35% 17.38% 8.67% 8.92% EAFE 0.98 0.93 1.00 S&P 500 10.61% 13.96% 12.67% 5.81% 8.53% 4.27% 8.96% S&P 500 0.97 0.87 0.92 1.00 MSCI 7.11% -5.32% -10.74% -2.02% 9.95% 6.25% 5.77% MSCI Israel 0.71 0.76 0.69 0.66 1.00 Israel TA-100 7.65% 8.71% -0.92% 2.99% 15.30% 8.91% 7.69% TA-100 0.83 0.86 0.80 0.79 0.86 1.00 TA-25 7.17% 12.26% 0.95% 3.95% 16.94% 9.44% 8.10% TA-25 0.85 0.87 0.82 0.80 0.86 0.99 1.00 BlueStar 7.61% 4.34% 0.36% 5.34% 17.25% - - BlueStar 0.86 0.87 0.84 0.80 0.88 0.98 0.97

*Annualized Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Source: BlueStar Global Investors LLC Mar 31 2012 Mar 31 2012

Index Weight as Index Weight as Company Name Ticker Exchange Company Name Ticker Exchange of Mar 31 2013 of Mar 31 2013 1 Teva Pharmaceutical Industries TEVA TASE 11.73% 48 888 Holdings Plc 888 LN 0.49% 2 Perrigo Co PRGO NASDAQ 8.62% 49 Ormat Technologies ORA NYSE 0.49% 3 Check Point Software (US) CHKP NASDAQ 6.13% 50 Syneron Medical Ltd ELOS NASDAQ 0.49% 4 Amdocs Ltd DOX NYSE 4.97% 51 Orbotech Ltd (US) ORBK NASDAQ 0.49% 5 Israel Chemical Corp ICL TASE 4.65% 52 Caesar Stone Sdot Yam Ltd CSTE NASDAQ 0.47% 6 Bank Hapoalim BM Reg POLI TASE 3.81% 53 Ceva Inc CEVA NASDAQ 0.45% 7 Bank Leumi Le-Israel BM LUMI TASE 3.80% 54 Delek Energy Systems Ltd DLEN TASE 0.45% 8 Israel Corp ILCO TASE 2.49% 55 Delek Automotive Systems Ltd DLEA TASE 0.44% 9 BEZEQ ISRAELI TELECOM CORP BEZQ TASE 2.31% 56 MELISRON Ltd. MLSR TASE 0.43% 10 VeriFone Systems Inc PAY NYSE 2.09% 57 Menorah Insurance Co Ltd 1 MMHD TASE 0.43% 11 Nice Systems Ltd NICE TASE 2.00% 58 Space-Communication Ltd. SCC TASE 0.43% 12 MELLANOX TECH MLNX NASDAQ 1.86% 59 ALLOT COMMUNICATIONS LTD ALLT NASDAQ 0.42% 13 Isramco Negev 2 LP ISRAp TASE 1.52% 60 Given Imaging Ltd GIVN NASDAQ 0.41% 14 Playtech PTEC LN 1.24% 61 Clal Industries CII TASE 0.41% 15 Electronics For Imaging EFII NASDAQ 1.23% 62 NITSBA Hldgs (1995) Ltd NTBA TASE 0.41% 16 Israel Discount Bank 0.1 DSCT TASE 1.23% 63 Ormat Industries ORMT TASE 0.41% 17 Mizrahi Tefahot Bank Ltd MZTF TASE 1.17% Rami64 Levi Chain Stores Hashikma Marketing RMLILtd. TASE 0.40% 18 Delek Group Ltd DLEKG TASE 1.13% 65 DSP Group DSPG NASDAQ 0.39% 19 Avner Oil & Gas Ltd LP AVNRp TASE 1.06% 66 Ituran Location & Control Ltd ITRN TASE 0.39% 20 Delek US Holdings DK NYSE 1.00% 67 Jerusalem Oil Exploration JOEL5 TASE 0.38% 21 Azrieli Group AZRG TASE 0.98% 68 Nova Measuring Instruments Ltd NVMI TASE 0.38% 22 Gazit Globe 1982 Ltd GLOB TASE 0.96% 69 PROLOR Biotech Inc. PBTH NYSE 0.37% 23 Elbit Systems Ltd ESLT TASE 0.94% 70 AMOT Investment Ltd AMOT TASE 0.37% 24 Taro Pharmaceutical Industries TARO NYSE 0.93% 71 Electra (Israel) ELTR TASE 0.37% 25 VERINT SYSTEMS VRNT NASDAQ 0.92% 72 Naphtha Israel Petroleum Corp NFTA TASE 0.37% 26 SodaStream International Ltd SODA NASDAQ 0.91% 73 Shufersal Ltd. SAE TASE 0.37% 27 Delek Drilling LP DEDRp TASE 0.79% 74 Clicksoftware Technologies Ltd CKSW NASDAQ 0.36% 28 LivePerson Inc LPSN NASDAQ 0.77% 75 Israel Phoenix Assurance 1 PHOE1 TASE 0.36% 29 First Intl Bank of Israel FTIN TASE 0.72% 76 Gilat Satellite Networks GILT TASE 0.35% 30 Paz Oil Company Ltd PZOL TASE 0.72% 77 Kamada KMDA TASE 0.35% 31 Osem Investment OSEM TASE 0.71% 78 Africa Israel Properties AFPR TASE 0.34% 32 Imperva Inc IMPV NYSE 0.70% 79 Airport City Ltd ARPT TASE 0.34% 33 Harel Insurance Inv Ltd 1 HARL TASE 0.69% 80 Africa-Israel Inv Ltd AFIL01 TASE 0.34% 34 Ezchip Semiconduct EZCH TASE 0.66% 81 Avgol Industries 1953 Ltd AVGL TASE 0.32% 35 Radware Ltd RDWR NASDAQ 0.64% 82 Jerusalem Economic Corp (ECJ) ECJM TASE 0.31% 36 Migdal Insurance Hdlgs MGDL TASE 0.62% 83 Evogene Ltd. EVGN TASE 0.31% 37 Ratio Oil Exploration L.P. RATIp TASE 0.60% 84 Matrix MTRX TASE 0.31% 38 Strauss Group STRS TASE 0.58% 85 Givot Olam Oil Exploration L.P. GIVOp TASE 0.30% 39 Frutarom FRUT TASE 0.57% 86 Bayside LandCorp 1 BYSD TASE 0.30% 40 Partner Communications Co Ltd PTNR TASE 0.57% 87 Formula Systems (1985) Ltd FORT TASE 0.30% 41 Clal Insurance Enterprises Hldgs CLIS TASE 0.55% 88 Cinema City International NV CCI WARSAW 0.30% 42 Shikun & Binui Ltd. SKBN TASE 0.54% 89 PLURISTEM THERAP PSTI NASDAQ 0.27% 43 Alon Usa Energy ALJ NYSE 0.53% 90 Koor Industries KOR TASE 0.27% 44 Aloni Hetz Properties ALHE TASE 0.53% 91 Ceragon Networks [US Listing] CRNT NASDAQ 0.25% 45 Oil Refineries Ltd ORL TASE 0.53% 92 Babylon Ltd. BBYL TASE 0.25% 46 Cellcom Israel Ltd. CEL TASE 0.52% 93 magicJack VocalTec Ltd CALL NASDAQ 0.24% 47 Protalix Biotherapeutics Inc PLX NYSE 0.49% 94 Clal Biotechnology Industrie CBI TASE 0.20%

BIGI Internal Characteristics Attribution

Currency Attribution Exchange-Related Attribution Total Index Weight Attribution of Total Index Attribution of Category Local Currency Listed on Local Currency Weight as of to BIGI Performance Performance vs Exchange(s) as of Performance to Mar. 31 2013 (Q1 2013) USD (Q1 2013) Mar. 31 2013 BIGI Performance Dual-Listed 32.00% 1.96% Israel – New Israeli Constituents Shekel 71.78% 2.53% 1.81% (TASE) Non-TASE 28.22% 3.58% Constituents US - US Dollar (NYSE, NASDAQ, 26.20% 0.00% 0.00% Non-TASE AMEX) Technology 21.90% 0.78% Constituents UK – GB Pound 1.72% -5.70% -0.01% (London)

Poland – Polish Zolty 0.30% -5.87% -0.00% (Warsaw)

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

BlueStar Israel Global Index Constituent Attribution vs Peers

BIGI Weight Relative to Q1 2013 Positive BIGI Weight Relative to Q1 2013 Negative Company Name MSCI Israel Capped Index Relative Weight Company Name MSCI Israel Capped Index Relative Weight (As of March 31 2013) Attribution (As of March 31 2013) Attribution

PERRIGO CO 8.62% 1.22% Verifone Systems 2.09% -0.63%

Delek US Holdings 1.00% 0.56% BEZEQ ISRAELI TELECOM -2.83% -0.58% TEVA PHARMACEUTICAL Playtech 1.23% 0.47% -10.49% -0.55% IND LTD ELECTRONICS FOR IMAGING 1.23% 0.41% ISRAEL CHEMICALS LTD -5.17% -0.39% AMDOCS LTD 4.98% 0.33% BANK HAPOALIM BM -4.75% -0.26% Caesar Stone Sdot Yam Ltd 0.47% 0.30% DELEK GROUP LTD -1.13% -0.22% VERINT SYSTEMS INC 0.92% 0.23% NICE SYSTEMS LTD -1.87% -0.20% Taro Pharmaceutical 0.93% 0.20% Industries EZCHIP SEMICONDUCTOR 0.66% -0.18%

ISRAMCO NEGEV 2 LP 1.53% 0.19% ALLOT COMMUNICATIONS 0.42% -0.14%

DSP Group 0.39% 0.15% BANK LEUMI LE-ISRAEL -3.89% -0.13%

After breaking important trend lines in November (during Israeli Global Equities’ rebound from the sharp drop at the beginning of Operation Pillar of Defense), the BlueStar Israel Global Index (BIGI) consolidated in December and resumed its upward movement in January and February. The market selloff during Operation 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. We think that BIGI’s price action during February and March may have been part of a mini bullish cup-and-handle technical formation with the area near the key level of 230 (depicted by the solid green line on the three-year chart below) as the handle. The 230 level coincides with a “soft” resistance area dating back to late 2011. BIGI took out that level in February, pulled back to 225, which is the bottom area of the “cup,” before recovering, and ended March back above 230 near the 235 level.

BIGI Daily Chart

30-Day Simple Moving Average

100-Day Simple Moving Average

Source: BlueStar Global Investors LLC (Jan 1 2010- March 31 2013) At this point, we are looking for further confirmation that the 230 level has transformed from a key resistance level to a new point of support. We are also looking for a more decisive break-out above the upper band of the upward channel depicted in the three-year chart below, currently at 233/235. If BIGI TM cannot hold above this level/above the channel, we suspect that the index could pull back to the 220 level, which is a secondary level of support coinciding with the bottom band of the aforementioned channel. At that level, or upon confirmation of 230 as the new level of support, we would look to buy Israeli Global Equities more aggressively.

BlueStar Israel Global Index Technical Analysis The longer-term outlook for Israeli equities continues to be firmly bullish as the index has re-entered the channel connecting the 2008/2009 lows, as illustrated in the BIGI TM six-year chart (below), which spans the entire 2008-2009 global financial crisis. The longer-term outlook will become even more bullish if Israeli Global Equities decisively breaks through the above-mentioned upper band of this channel which has crept up above the 235 level. At February’s highs, BIGI did in fact break through the upper band of the channel before pulling sharply back into the channel. In March, the Index continued to rise as it hugged the upper band of the channel. If this breakout occurs, we see the projected upside potential of the index to be at the 300 level by mid- 2013, though most likely following a break at the resistance level of 245-250 (depicted by the solid green line on the 6-year chart below) and a consolidation at the 2011 high of 275.

BIGI Daily Chart

50-Day Simple Moving Average

200-Day Simple Moving Average

Source: BlueStar Global Investors LLC (January 1 2007- March 31 2013)

Risk management parameters for those with a shorter time horizon have not changed since February and should include a stop- loss activated with a daily close below the lower band of the upward channel which, for now, coincides with the former 220 resistance level, and a “hard” stop-loss with a weekly close below the 200 level. For the longer-term investor, if these levels are breached and then confirmed with a weekly close of BIGI below 195, the longer-term outlook will shift dramatically, and any rallies should be sold. A breach of 195 would increase the likelihood that the spring 2011 peaks represent the ‘head’ of a massive ‘head and shoulders’ pattern which would project a major decline to around 135, just above the autumn 2008/March 2009 lows. However, as these stop-loss levels have so far held, the close of BIGI decisively above the 220 level has confirmed that this major multi-year support level has held, and is most likely a base for a sustained rally. If the latter scenario develops, we would maintain our medium and long-term targets as high as the 275 and 300 levels, respectively.

PE: 17.25 TEVA (11.73% of BIGI) Yield: 2.90%

50-Day Simple Moving Average

200-Day Simple Moving Average

Check Point Software (6.13%) PE: 15.54 Perrigo Co. (8.62%) PE: 24.89 Yield: n/a Yield: 0.30%

PE: 14.69 PE: 11.62 Amdocs (4.97%) Yield: 1.08% Israel Chemicals (4.65%) Yield: 6.20%

Bank Hapoalim (3.81%) PE: 8.77 Bank Leumi (3.80%) PE: 20.01 Yield: n/a Yield: n/a

PE: 7.72 Israel Corp(2.49%) PE: n/a Bezeq Telecom (2.31%) Yield: 15.11% Yield: 2.05%

* Q3 2012 saw a severe one time drop in earnings PE: 28.92 VeriFone Systems (2.09%) Yield: n/a

Health Care Sector Q1 2013 Q4 2012 Q3 2012 Q2 2012 As defined by Israeli Health Care stocks were the Performance Performance Performance Performance BlueStar Indexes best performers in Q1 2013 after being Health Care 2.08% -1.97% 0.31% 0.13% among the worst performers since Oil & Gas 1.23% 2.15% 0.76% -1.57% Israeli Global Equities’ mid-2012 Financials 1.13% 4.45% 0.73% -2.66% recovery began. Israel is home to Technology 0.95% 1.54% 1.40% -4.51% world-renowned Health Care Basic Materials 0.73% -0.16% 0.93% -0.89% companies including pharmaceutical, Industrials 0.55% 0.11% 0.26% -0.79% biotechnology, and medical equipment companies, and they are among the Telecommunications 0.41% -0.40% 0.25% -2.12% highest-weighted Israeli Global Equities Consumer Services 0.38% 0.04% 0.22% -0.40% by market capitalization. In March, we Consumer Goods 0.20% 0.12% -0.03% -0.60% learned that exports of pharmaceutical Utilities -0.05% -0.30% -0.07% -0.12% products from January through February 2013 were 43% higher than they were from November through December 2012. Health Care stocks, especially pharmaceuticals companies, have also been among the best performers in other global equity markets. Financials

The Financials have been among the top three performing sectors over the past two quarters. Aside from increased mortgage activity, rising home prices, and rising equity prices, the Israeli banking system has been able to limit its exposure to the European financial crisis with minimal exposure to Cypriot and PIIGS’ sovereign debt. The major Israeli banks’ capital adequacy ratios are above what is required by the Ministry of Finance and their stability has been the bedrock of the Israeli economy and equity market recovery over the past several quarters. The banks and other financial companies are still exposed to regulatory risks, however. As the new government takes over, Israel’s leaders will continue to seek ways to increase competition in the financial and non-financial markets there. In March, the Bank of Israel adopted recommendations for increasing competition in the banking industry which it hopes will reduce the cost of banking services for small businesses and households, increase the total available credit, and increase the quality of service. Energy

The Oil & Gas sector continues to be a leader within Israeli Global Equities. This industry is still in its infancy but is maturing quickly. The first deliveries of natural gas from the Tamar reservoir arrived in Israel as of the first of April. For several quarters we have promoted an overweight in the Oil & Gas sector, especially beginning in December 2012, when GDP projections for 2013 began to emerge stating that Israel’s Oil & Gas sector would account for nearly one-third of Israel’s 2013 GDP growth. Though this sector currently holds a small weight in the BlueStar Israel Global Index, the weight will grow over the years and decades to come; overweighting smaller growth sectors, we believe, is a prudent long term investment strategy. It is certainly not expected that this group of stocks will rise in a straight line. There will be times when the group is over-valued or when certain risks are not discounted fully, but we are viewing this sector as a long-term buy-and-hold investment.

The positive impact on Israel’s economy of the natural gas reserves is already being felt – the market believes that, in the coming months, electricity rates will either be reduced or rise much less than they have in recent months. Also, gasoline prices are dropping as a side effect of the first natural gas deliveries. In addition to reducing inflationary pressures in the economy and eventually creating jobs, energy independence will cause a dramatic, positive shift in Israel’s Balance of Payments, making Israel a wealthier and even more credit-worthy nation on the whole. Technology

A quick note on Israeli Global Technology stocks: many analysts’ forecasts called for economic activity in 2013 to be back- end loaded as technology stocks have lagged the overall market on a global scale, but we suspect that analysts may have too harshly discounted the net export segment of GDP which has strong implications, especially for Israel’s technology exporters, but also for health care, food-products, and service exporters. 9 © 2013 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security Developments in the Corporate Arena and Capital Markets

Israel’s Global Footprint

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

. Private equity deals in Israel were down 10% in 2012 but 2013 has seen international hedge funds step in an this trend is reversing . In the period between January and February diamond exports were up 74% vs November through December 2012, and exports excluding diamonds were up 4% mostly due to higher pharmaceutical product sales . Apple opened its third R&D center in Israel . Israeli developers are ramping up their investment in cash-producing assets in some o f Germany’s biggest cities . The state of Virginia is investing $10 million in Israeli “agri-tech” companies . Delek Group and Israel Chemicals will supply and design equipment for a San Diego desalinization plant . Israel Chemicals to supply China with 600,000 tons of potash in the first half of 2013 . Israel’s Can-Fite is moving drug production to China .Strauss bought out its partner’s stake in Russian coffee company, Le Café, for $13.4 million. Strauss is the world’s fourth largest coffee company

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 encourage more private Israeli companies to list on the local stock exchange and retain Israel as their place of business rather than selling out, sometimes prematurely, to private equity or international companies.

An April 9th Globes’ article stated that 100 companies chose to delist from the TASE between 2010 and 2012. The disconnect between Israel’s economy and corporate sector ability to generate earnings and the efficiency of the equity markets there is blatant. Though there are no quick fixes, solutions are available: adjusting the regulatory and tax environment, a strong push for Israel to be included in regional equity indexes, higher visibility for Israeli Global Equities, and better access for foreign investors. We have seen the flow of assets to Israeli mutual funds steadily improve in the first quarter of 2013, and expect this trend to continue. Debt Market

The recovery in Israel’s corporate debt market which began in Q3 2012 shows that the cost of capital in Israel has decreased and that some risk has been removed from the Israel Non-Government Bond Index valuation of financial instruments. We think this is the most encouraging sign for the long (Jan 2010 – Mar 2013) term direction of Israel’s economy and Israeli capital markets across most asset classes. Israel’s debt markets had been in a state of disarray with large amounts of refinancing and debt restructurings taking place and slated to take place in the near future.

The Bank of Israel has managed Israel’s interest rate environment well given conflicting influences on the economy. With rapidly rising housing prices but otherwise acceptable inflation and threats of an economic slow down stemming from Europe’s economic woes, the Bank of Israel decided to lower rates throughout 2012. Despite this, the Shekel has risen strongly in recent months. Also, the Israeli government recently held a bond auction in N.Y.: the issue was over-subscribed and the government was able to sell dollar- denominated debt at the lowest rate ever. These developments mean that investors around the world are confident in the stability of the Shekel and the stability of Israel’s economy; this confidence trickles down into the private debt and equity markets as well. 10 © 2013 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security Israel Economic Review & Outlook

Israel’s GDP Growth Factors Israel GDP Growth Israel vs OECD Members Economic activity began to improve in early 2013. The Israeli purchasing manager’s index reached the expansion level, and key areas of the economy-- the export demand and the employment components of the index--were firmly above the expansion level. The industrial production index was up 5.7% and the consumer confidence index was up 3.8% in the first two months of the year compared to the two months prior.

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 also increased its 2014 GDP forecasts slightly to 4.0% (3.3% excluding the effects of natural gas), which reflects acceleration in non-gas economic activity influenced by economic expansion around the world. * Estimates as of December 2012

Fiscal Policy Israel GDP Growth vs Other Major Economies

The government budget issues were expected to be one of the Country 2009 2010 2011 2012 2013* 2014* greatest sources of volatility in the Israeli markets in the first quarter of 2013. This did not materialize, though the issue is still of concern. Israel 0.8 4.8 4.8 3.1 2.9 3.9 As the inexperienced Yair Lapid stepped into the role of Minister of U.S. -3.5 3.0 1.7 2.2 2.0 2.8 Finance he vowed to crack down on government spending and tax collection. Fiscal hawkishness is generally unpopular but responsible China 9.2 10.4 9.2 7.5 8.5 8.9 and will provide stability to Israel’s economy and capital markets from France -3.0 1.6 1.7 0.2 0.3 1.3 a high-level perspective. However, anti-growth tax policy is still on the table and would create a bearish air across Israel’s capital Germany -5.1 3.6 3.1 0.9 0.6 1.9 markets. According to the Bank of Israel, government spending must Brazil -0.3 7.6 2.7 1.2 4.0 4.0 decrease by NIS 13 billion which would still allow for 4.5% growth in government expenditures compared to 2012’s budget. OECD Total -3.8 3.2 1.8 1.4 1.4 2.3

* Estimates as of December 2012 Inflation and Monetary Policy Shekel/US Dollar The Bank of Israel lowered the policy interest rate several times in 2012, capped off by a 25 basis point cut in December. The policy rate remained at 1.75% throughout the first quarter of 2013 and is expected to remain there for the duration of the year.

The Bank of Israel’s interest rate policy is made in light of inflation remaining within the target range of 1% to 2%. Inflation over the past Strength twelve months as of the end of February was 1.8% and the rate of

inflation over the next 2-3 years is expected to be 2.4%. Shekel

New Israeli Shekel Performance

Despite lowered interest rates, fiscal uncertainty, and Operation Pillar of Defense, the Shekel continued to climb against the US Dollar and slightly appreciated against the Euro in the second half of 2012; it accelerated its appreciation in the first quarter of 2013. The rise in Shekel/Euro Rate the Shekel against the dollar stool in contrast to the broader trend of global currencies weakening against the dollar.

We attribute the strength of the shekel to relatively high interest rates, relatively high economic growth, economic and financial stability and resiliency, as well as to structural shifts in Israel’s balance Strength of payments picture deriving from the emerging energy industry

there. In early April, though, the Bank of Israel began intervening Shekel directly in foreign exchange markets, buying dollars and selling shekels. We believe this is a prudent and necessary step in order to facilitate the growth of the Israeli economy and emerging natural gas sector as inflation remains low.

The divergence between Israeli and US equities over the past sixth months or so represents the largest performance differential between the two markets in recent years, and we attribute this mostly to overblown fears of geopolitical risks in the local market. As we have seen repeatedly, investors in Israeli markets typically overreact to geopolitical risks and long-term investors are rewarded with strong outperformance once fear-based selling subsides. Geopolitical and political risks do exist, however, and they will likely continue to pressure Israeli equities well into the first half of the New Year. Tensions have diminished between Israel and Hamas in Gaza but the exchange of fire resumed in March 2013.

The civil war in Syria has continued to deteriorate. Fighting has spilled over into Lebanon, Turkey, and the Golan Heights. The civil war in Syria has spilled over in several isolated instances into both Israel and Lebanon. There does not seem to be an immediate wide-scale threat to Israel in the North but the situation is worrisome. In regards to investing in Global Israeli Equities, we keep a watchful eye on developments but defer making decisions based on geopolitical risks until the situation devolves to the point that military confrontation seems imminent. Also in late March and early April, rockets were fired from Gaza into Southern Israel for the first time since the November 2012 truce. Israel responded to these attacks with a targeted airstrike in Northern Gaza. Finally, several reports in early April point to Iran halting uranium enrichment until after its mid-summer presidential elections, although few expect Iran to become more flexible in its on-again/off-again negotiations with the P5+1 talks, most recently held in Kazakhstan.

On a positive note, President Obama visited Israel in March. During his visit he made several speeches giving Israelis a sense of reassurance that the U.S. will not allow Israel to face its enemies alone. This reassurance from Obama seemed to affect participants in the financial markets as Israeli Global Equities rose throughout March and after the President’s speeches. The main geopolitical event of the month, though, was an unexpected call by Prime Minister Netanyahu to Prime Minister Erdogan of Turkey in which the Israeli leader apologized for possible miscalculations which lead to the death of Turkish activists on a Gaza-bound flotilla back in 2010. This apology led immediately to the announcement that the two former allies would return to normalized relations – although Turkey has since been partly backtracking on its commitments. The impact is multifaceted: bilateral trade and travel can work its way back to normalcy; the two nations can cooperate on military exercises and intelligence sharing as they used to and resume the trade of military systems and equipment; and most notably, the two nations will be able to cooperate on exploring arrangements to sell Israeli natural gas to Turkey, whose domestic gas consumption is expected to grow along with its economy over the next decade.

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