Merrill Lynch warns that Israel's standing as a defensive market for investment is "starting to look shaky" even as the most recent Merrill Lynch Fund Manager Survey finds "Israelis gaining favor with investors." However, Israel has the weakest earnings momentum of all emerging countries, as earnings have collapsed relative to the region year to date.
Merrill Lynch warns, "We expect Israel to be hurt by the slowdown in the US. Historically, about 30% of the country’s GDP can be linked to US economic growth. Early economic indicators point to a slowdown in exports and there are initial signs of an overall cooling of economic activity. We now expect economic growth to slow from 5.3% in 2007 to 3.5% in 2008. However, while such a scenario incorporates a significant decline in economic activity (down 30%), these are still relatively healthy growth figures."
Merrill Lynch predicts 1.9% inflation in 2008 and that the Bank of Israel will likely have to lower rates to an all-time low 2.5% in 2008. "As elsewhere, high food and energy prices keep up headline inflation in Israel. But, that’s not the full story: productivity gains have decreased; unemployment is at its lowest rate in a decade; real wages have been increasing, and unit labor costs are on an upward trend. The slowdown in growth and expanding capacities are likely to cool inflationary pressure to a certain extent. Massive shekel strength has also created extra room to maneuver for the Bank of Israel. With growth losing steam, the budget staying in good shape, the Fed cutting rates, and the shekel continuing to benefit from increasing yield support, inflation should not be a concern in 2008."
Assuming "no triggers or news flow from politics or geopolitics, volatility and liquidity will remain the name of the game, especially with cash levels at historical highs." Merrill Lynch's stock picks for the second quarter are Israel Chemicals Ltd. (TASE: ICL), which will continue to enjoy favorable pricing trends and superior margin expansion; Delek Automotive Systems Ltd. (TASE: DLEA), with a 13% dividend yield together with domestic macroeconomic and private consumer expansion; and Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), for the same reasons.
Merrill Lynch has also replaced Israel Discount Bank (TASE: DSCT) with Oil Refineries Ltd. (TASE:ORL), "where key earnings drivers have started to gain momentum, highlighted by diesel margins hitting all-time highs in the first quarter." Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA; TASE: TEVA) will continue to diversify the portfolio.
Published by Globes [online], Israel business news - www.globes-online.com - on April 7, 2008
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