No Time to Sell Israel Stocks as Goldman Sees Rates Set for Zero

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By several measures, the rally that’s driven Israeli stocks to all-time highs is no reason to sell.

The 12-month price-to-estimated earnings on equities in Tel Aviv was at least 12 percent lower than in the U.S. and Europe. A key indicator based on the volatility on the benchmark TA-25 Index is sending a bullish signal, and trends in the gauge’s moving averages signal prices may extend gains in the best start to a year since 2009.

Israeli stocks surged about 60 percent since the central bank started lowering interest rates in September 2011, cutting borrowing costs for companies and consumers in the $280 billion economy. Goldman Sachs Group Inc. predicts policy makers will reduce rates to zero in the coming months, helping to fuel the stock rally.

“It looks like the only thing that will stop the rise in prices is an interest-rate hike, which isn’t very close,” Amir Gil, chief investment officer at Tel Aviv-based Psagot Provident Funds & Pension, who manages 67 billion shekels ($17.3 billion) and has increased his holdings in bank and gas shares, said by phone on Tuesday.

The TA-25 is priced at about 14 times its one-year projected earnings, near the highest since 2008, compared with 17 times for the Standard & Poor’s 500 Index and 16 times for the MSCI Europe Index. The gauge last broke the Upper Bollinger Band on May 21, which may mean the continuation of the bullish trend. Bollinger bands are designed to alert investors when a security rises too high or falls too low by comparing its price to the past average level.

The Tel Aviv Banking Index climbed 13 percent this year to 1,412.79 on May 21, the highest in more than four years. Bank Leumi Le-Israel Ltd., the nation’s second-largest lender by assets, was the biggest gainer in the period, with a 16 percent increase.

Rate Cut

The central bank, led by Governor Karnit Flug, last cut the benchmark interest rate in February to prevent the shekel’s gains from curbing exports, which account for about a third of gross domestic product, and bring annual inflation back within the regulator’s target range of 1 percent to 3 percent. The nation’s economy expanded 2.8 percent in 2014, the slowest pace in five years.

Kasper Lund-Jensen, a London-based analyst at Goldman Sachs, predicted in a May 25 note that the Bank of Israel will lower the interest rate to zero to weaken the currency and spur inflation.

Even with the rate cuts, the shekel has strengthened 0.6 percent this year to 3.8753 against the U.S. dollar at 11:52 a.m. in Tel Aviv on Monday. The yield on government debt due 2024 tumbled 94 basis points to a record 1.37 percent on April 26. It was at 1.74 percent

For Gilad Alper, a senior analyst at Excellence Nessuah Brokerage in Petach Tikvah, Israel, the stock-market rally is more a function of near-zero interest rates than the performance of companies.

Fantastic Alternative

“Overall, equities are a fantastic alternative but there’s nothing particularly positive when stocks rise for technical reasons and not for fundamental economic reasons,” Alper said by phone on Tuesday. “They tend to come crashing down at some stage.”

The TA-25 declined 2.3 percent last week, the most since the five days ending April 30. Still, the gauge has been trading above its 50-day moving average since Feb. 16, signaling the bullish trend remains. None of the TA-25 Index members has had new 52-week lows in more than two months, the longest streak since August, Bloomberg data show. The gauge rose 0.4 percent on Monday.

“Israeli stocks are the preferable option, even if they aren’t terribly cheap,” Gil said.

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