The Bank of Israel is increasing the risk element in its $100 billion foreign currency portfolio, following its assessment that the global economy is recovering.
The Bank of Israel Monetary Committee approved a 25% increase in the share component in the portfolio recommended by the Marketing Operations Department, which manages the foreign currency balances held by the bank. Another Marketing Operations Department recommendation adopted is a 25% increase in investment-rated investments in corporate bonds. The decision, combined with the size of the Bank of Israel's investment portfolio, means the purchase of billions of dollars in shares and bonds
The Bank of Israel is slated to buy shares on the Australian and Canadian stock exchanges this year for the first time in order to reflect the their relative weight in the world's stock exchanges in developed countries. Further changes in addition to the purchase of additional corporate bonds are expected; for the first time, the Bank of Israel will buy corporate bonds of investment-rated companies listed on stock exchanges in Europe, not just the US.
The targets for 2017 are investing 12.5% of the portfolio in shares traded on the stock exchanges of developed markets around the world and 8% in corporate bonds of investment-rated companies traded on stock exchanges in the US and Europe with an average duration of 1.8 and 1.5 years, respectively.
A review presented by the Marketing Department, headed by Andrew Abir, to the Monetary Committee stressed the improvement in corporate profit in the US and the great resilience demonstrated by the capital markets in 2016 despite the shocks that occurred: concern about a crisis in China, concern about the stability of banks in Europe, Brexit, and the dramatic triumph of Donald Trump in the US presidential elections.
The Bank of Israel is paying for its foreign currency purchases by issuing short-term loans (STLs) in the domestic market. The low interest rate paid on STLs and the increase in the share component have given the Bank of Israel's portfolio a positive return over the past two years. In 2016, for example, the surplus of return over the financing costs on the STLs, excluding exchange rate differences, was 1%.
The Bank of Israel's asset portfolio currently consists of 85% bonds issued by the US and European governments, with the remainder in shares of companies listed on stock exchanges in the US, Europe, and Japan (10%) and bonds issued by investment-rated US companies (5%).
The composition in 2017 reflects an increase in the risk component. The risk is assessed at a 95% probability that the maximum annual loss will be 3.5% of the portfolio, compared with 3% in 2016. The Bank of Israel's current investment policy allows an increase in the risk assessment up to an annual 4% loss. To illustrate the point, the Bank of Israel cites the example of the 2008 crisis, in which the S&P 500 index plummeted 40% in one year. The loss in the portfolio at the time did not exceed 3%.
Published by Globes [online], Israel Business News - www.globes-online.com - on February 6, 2017
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