BlueStar Israel 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). 170 120 70 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.