With the dollar falling to new lows, dragging down inflationary expectations with it, the chances are that Governor of the Bank of Israel Prof. Stanley Fischer will make a further cut of 25 basis points in the interest rate, says Union Bank in its weekly market review. If this happens, the negative interest rate differential between the shekel and dollar could widen from the current 1.5% to 1.75%, given that the US Federal Reserve Board's Open Market Committee has left the current 5.25% interest rate on hold for the time being.
"We continue to take the view that pricing levels on the Tel Aviv Stock Exchange (TASE) have reached maximum capacity, having taking into consideration the continuing fall in long returns and the possibility of a further interest rate cut by the Bank of Israel in light of the dollar's collapse," Union Bank writes.
Union Bank reiterates its advice to investors to channel half of their equities investments into markets overseas, among them Japan and Europe, which, it feels, are not fully priced. The Japanese banking and real estate sectors look especially interesting. In Europe, Germany has produced positive macro data, while the election of right-wing candidate Nicolas Sarkozy, a person known for his capitalist approach, as France's next president, has created the potential for further economic reform in that country.
Overall, Union Bank continues to advise investors to stick with defensive stocks as well as stocks with a high-dividend yield. The bank notes that last week saw a fall in returns on shekel-denominated instruments in all ranges, save for the short-term. The lower returns came against the backdrop of the continuing strength of the shekel-dollar rate, which edged below the NIS 4/$ level.
Union Bank expects that the shekel-dollar rate this week will be NIS 3.90-4/$. The shekel will have support at NIS 3.80/$, and the closest resistance rate is NIS 4.05/$.
Published by Globes [online], Israel business news - www.globes.co.il - on May 13, 2007
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