BlueStar Israel Equity Update€¦ · The BlueStar Israel Global Index rose 6.72% in Q1 2014 while the TA-100 rose 5.64% and the BlueStar Israel Global Technology Index rose 5.78%

These are not recommendations to buy or sell any security © 2014 BlueStar Global Investors, LLC

BlueStar Israel Equity Update Second Quarter 2014

All major global developed market equity benchmarks rose strongly in Q1 2014 after

a strong finish to 2013. However, the first quarter was noticeably volatile with sharp

swings in most global equity benchmarks throughout the quarter.

The BlueStar Israel Global Index rose 6.72% in Q1 2014 while the TA-100 rose

5.64% and the BlueStar Israel Global Technology Index rose 5.78%

The rally in Israeli Global Equities in the second half of 2013 was broad based across

and within sectors. There was a different story in Q1 2014 as the rally in the major

Israel equity indexes was led by a few heavily-weighted stocks: Teva Pharmaceuticals

accounted for a majority of the BlueStar Israel Global Index’s rise in the first quarter

signaling weaker internals for the broader Israeli equity market.

The Israeli government budget surplus remains in line with the seasonal path

required to remain within the debt ceiling target for 2014

The revival in trading volume and capital raises on the TASE which began in the

second half of 2013 continued into the first quarter of 2014 as regulators continued to

explore ways to steepen the local exchange’s trajectory in those categories

The Bank of Israel lowered its policy interest rate to 75 bps in the first quarter of 2014,

signaling that it may continue to prolong its expansionary policy even if the Federal

Reserve begins to tighten sooner than expected.

The Shekel weakened slightly against the U.S. Dollar and the Euro during the first

quarter.

Q1 2014 in Review & 2014 Outlook

BIGI Performance (BlueStar Israel Global Index, Jan. 2010- Mar. 2014)

1

1.

2.-6.

7-9.

10.

11.

12.

13.

Israeli Global

Equities in Q4

2013

About the BIGI &

BIGTech Indexes,

Rebalance Review,

and Risk/Return

Data

Technical Analysis

Israeli Sector

Spotlight

Israeli Capital

Markets Update

Israeli Economic

Review & Outlook

Geopolitical

Environment

What’s Inside

70

90

110

130

150

170

190

TA-100

S&P 500

BIGI

About the BlueStar Israel Global Index The BlueStar Israel Global Index (’BIGI’) provides a benchmark for investors to track the broadest and deepest universe of Israeli

public companies. The index is constructed using BlueStar Indexes’ unique methodology and proprietary database of Israeli and

Israel-linked companies. BIGI includes the largest and most liquid companies as well as mid and small cap companies that display

sufficient liquidity for global investors. The index methodology allows for the inclusion of Israeli companies listed on the Tel Aviv

Stock Exchange as well as other exchanges such as the London Stock Exchange, New York Stock Exchange, and NASDAQ. The

BlueStar Israel Global Index has been created to provide investors with an investable product allowing them to quickly take

advantage of both event-driven news and long-term economic trends as the economy and companies of Israel continue to evolve.

Comparative Sector Weights Long- Term Returns*

Five Year Correlations Comparative Risk (Standard Deviation of Returns)*

*Annualized 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Mar. 31, 2014

*Annualized 1Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Mar. 31, 2014

Source: BlueStar Global Investors LLC Mar. 31, 2014

Source: BlueStar Global Investors LLC Mar. 31, 2014


2

Sector BIGI MSCI -

EIS

FTSE

Israel TA-25 TA-100

Information Technology 30.6% 7.0% 3.6% 5.0% 8.5%

Health Care 30.0% 25.1% 55.2% 23.0% 25.1%

Financials 18.3% 35.1% 20.3% 33.3% 32.1%

Materials 5.4% 10.6% 6.8% 9.2% 7.5%

Energy 5.1% 4.9% 3.8% 14.0% 11.3%

Telecom Services 3.4% 8.2% 5.4% 10.2% 7.3%

Industrials 2.7% 4.5% 2.6% 2.8% 4.4%

Consumer Discretionary 2.4% 0.6% 0.3% 0.0% 0.9%

Consumer Staples 1.7% 4.0% 2.0% 2.5% 3.0%

Utilities 0.5% 0.0% 0.0% 0.0% 0.0%

YTD

3/31/14 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1

ACWI 1.21% 17.19% 9.14% 18.43% 7.53% 4.91% 8.13%

EAFE 0.77% 18.04% 7.72% 16.56% 7.01% 4.91% 7.15%

MSCI EM -0.37% -0.85% -2.54% 14.83% 10.45% 10.33% 8.11%

S&P 500 1.81% 21.86% 14.66% 21.16% 7.42% 4.46% 9.20%

MSCI Israel 18.71% 24.02% -1.79% 7.25% 7.00% 7.24% 6.35%

TA-100 5.64% 21.43% 1.95% 18.24% 11.39% 10.06% 8.02%

TA-25 4.90% 17.97% 1.91% 18.23% 13.28% 10.45% 8.25%

BlueStar 6.72% 26.78% 4.54% 20.27% 12.20% - -

YTD

3/31/14 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception1

ACWI 12.73% 10.96% 14.52% 16.22% 16.63% 16.50% 15.50%

EAFE 13.91% 13.49% 16.75% 18.47% 18.28% 17.65% 16.79%

MSCI EM 16.01% 14.19% 19.49% 21.63% 23.96% 23.47% 23.58%

S&P 500 11.83% 9.96% 12.47% 13.99% 14.71% 15.48% 14.87%

MSCI Israel 11.69% 12.30% 19.58% 19.29% 18.93% 24.18% 23.78%

TA-100 11.25% 12.07% 17.07% 19.87% 21.60% 24.07% 24.27%

TA-25 13.69% 14.41% 17.75% 20.35% 21.83% 24.29% 24.34%

BlueStar 9.07% 9.61% 16.94% 19.44% 19.95% - -

ACWI MSCI EM EAFE S&P 500 MSCI

Israel TA-100 TA-25

ACWI 1.00

MSCI EM 0.92 1.00

EAFE 0.98 0.88 1.00

S&P 500 0.96 0.81 0.89 1.00

MSCI Israel 0.69 0.71 0.64 0.66 1.00

TA-100 0.82 0.82 0.79 0.75 0.86 1.00

TA-25 0.81 0.83 0.78 0.75 0.84 0.99 1.00

BlueStar 0.85 0.83 0.82 0.79 0.87 0.98 0.95

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About the BlueStar Israel Global Technology Index (BIGITech)


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The BlueStar Israel Global Technology Index provides a benchmark for investors to track Israeli and Israel-linked technology

companies trading worldwide. The index is constructed using BlueStar Indexes’ unique methodology and proprietary database

of Israeli and Israel-linked companies. BIGITech is a modified market capitalization weighted index, capping the top-weighted

constituents at 10%. It includes the largest and most liquid technology companies, as well as mid and small cap companies that

display sufficient liquidity for global investors. The methodology allows for the inclusion of Israeli companies listed on the Tel

Aviv Stock Exchange and other major exchanges such as the London Stock Exchange, New York Stock Exchange, and

NASDAQ. Furthermore the methodology provides for the inclusion of companies that develop, manufacture, and/or deliver

innovative technologies in a wide range of tech sectors, including Bio-Tech, Agri-Tech, Defense-Tech, Clean-Tech as well as

Info-tech. The BIGITech Index provides investors with an investable benchmark that allows them to quickly take advantage of

event-driven news, industry trends, market/industry cycles, as well as the potential for capital appreciation driven by Israeli

technological innovation.

Index Internals Data

Preliminary Index Statistics

No. of Securities 49

Currency USD

Max. Security Weighting 10.23%

Concentration Ratio 59.90%

Annualized 5 Year Performance 24.41%

Dividend Yield n/a

Primary Listing of Constituents

New York (NYSE/NQ) US Dollar 70.26%

Tel Aviv (TASE) Israeli Shekel 23.02%

London (LSE) British Pound 6.72%

Industry Weight

Software 30.44%

I.T. Services 20.20%

Semiconductors 9.77%

Computers & Peripherals 7.92%

Communications Equipment 7.21%

Biotechnology 4.46%

Health Care Equipment $ Supplies 4.14%

AeroSpace & Defense 3.01%

Internet Software & Services 2.92%

Diversified Financial Servcies 1.59%

Electronic Equipment & Components 1.54%

Utilities 1.47%

Life Sciences Tools & Services 1.37%

Electrical Equipment 1.27%

Telecommunication Services 1.05%

Hotels, Restaurants & Leisure 1.02%

Pharmaceuticals 0.63%

GICS Industry Breakdown

Mar. 31, 2014

Mar. 31, 2014

Mar. 31, 2014

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BlueStar Israel Global Index Constituents and Weights


Company Name Ticker Exchange Index Weight as of Mar. 31, 2014

1 Teva Pharmaceutical Industries TEVA IT 14.80%

2 Perrigo Company plc PRGO UN 9.28%

3 Check Point Software (US) CHKP UQ 6.97%

4 Amdocs Ltd DOX UQ 5.06%

5 Bank Hapoalim BM Reg POLI IT 4.04%

6 Bank Leumi Le-Israel BM LUMI IT 3.65%

7 Stratasys Ltd SSYS UQ 2.76%

8 VeriFone Systems Inc PAY UN 2.67%

9 Israel Chemical Corp ICL IT 2.65%

10 BEZEQ ISRAELI TELECOM CORP BEZQ IT 2.15%

11 Nice Systems Ltd NICE IT 1.84%

12 VERINT SYSTEMS VRNT UQ 1.63%

13 Delek Group Ltd DLEKG IT 1.61%

14 Opko Health Inc OPK UN 1.47%

15 Israel Corp ILCO IT 1.36%

16 Mizrahi Tefahot Bank Ltd MZTF IT 1.26%

17 Taro Pharmaceutical Industries TARO UN 1.19%

18 Delek Energy Systems Ltd DLEN IT 1.15%

19 MELLANOX TECH MLNX UQ 1.13%

20 Israel Discount Bank 0.1 DSCT IT 1.10%

21 Playtech PTEC LN 1.08%

22 Imperva Inc IMPV UN 0.94%

23 Elbit Systems Ltd ESLT IT 0.94%

24 Delek US Holdings DK UN 0.86%

25 Azrieli Group AZRG IT 0.79%

26 Gazit Globe 1982 Ltd GZT IT 0.75%

27 Caesar Stone Sdot Yam Ltd CSTE UQ 0.72%

28 Frutarom FRUT IT 0.71%

29 SodaStream International Ltd SODA UQ 0.67%

30 Paz Oil Company Ltd PZOL IT 0.65%

31 Cellcom Israel Ltd. CEL IT 0.62%

32 Ezchip Semiconduct EZCH IT 0.61%

33 Partner Communications Co Ltd PTNR IT 0.60%

34 Discount Investment Corp DISI IT 0.59%

35 Radware Ltd RDWR UQ 0.57%

36 Harel Insurance Inv Ltd 1 HARL IT 0.55%

37 Osem Investment OSEM IT 0.53%

38 LivePerson Inc LPSN UQ 0.52%

39 Strauss Group STRS IT 0.49%

40 Plus500 Ltd PLUS LN 0.48%

41 Orbotech Ltd (US) ORBK UQ 0.48%

42 Migdal Insurance Hdlgs MGDL IT 0.48%

43 Ormat Technologies ORA UN 0.46%

44 Shikun & Binui Ltd. SKBN IT 0.46%

45 Clal Insurance Enterprises Hldgs CLIS IT 0.46%

46 Aloni Hetz Properties ALHE IT 0.45%

47 Compugen Ltd CGEN UQ 0.44%

48 Jerusalem Oil Exploration JOEL IT 0.42%

49 Syneron Medical Ltd ELOS UQ 0.41%

50 Ormat Industries ORMT IT 0.40%

51 NITSBA Hldgs (1995) Ltd NTBA IT 0.40%

52 Silicom Limited SILC UQ 0.38%

Company Name Ticker Exchange Index Weight as of Mar. 31, 2014

53 First Intl Bank of Israel FTIN IT 0.38%

54 Delek Automotive Systems DLEA IT 0.38%

55 Ceva Inc CEVA UQ 0.37%

56 Rami Levi Chain Stores RMLI IT 0.37%

57 Mazor Robotics Ltd. MZOR IT 0.36%

58 Ituran Location & Control Ltd ITRN IT 0.36%

59 Kamada KMDA IT 0.35%

60 AMOT Investment Ltd AMOT IT 0.35%

61 Nova Measuring Instruments NVMI IT 0.34%

62 MELISRON Ltd. MLSR IT 0.32%

63 Clicksoftware Technologies CKSW UQ 0.32%

64 888 Holdings Plc 888 LN 0.32%

65 Delta-Galil Industries DELT IT 0.32%

66 ALLOT COMMUNICATIONS ALLT UQ 0.32%

67 Alon Usa Energy ALJ UN 0.30%

68 Menorah Insurance Co Ltd 1 MMHD IT 0.30%

69 Naphtha Israel Petroleum NFTA IT 0.30%

70 Shufersal Ltd. SAE IT 0.30%

71 Global City Holdings NV GCH PW 0.30%

72 Africa Israel Properties AFPR IT 0.29%

73 Electra (Israel) ELTR IT 0.28%

74 Photomedex Inc PHMD UQ 0.28%

75 Evogene Ltd. EVGN IT 0.28%

76 Telit Communications Plc TCM LN 0.27%

77 Brainsway Ltd. BRIN IT 0.27%

78 Africa-Israel Inv Ltd AFIL IT 0.27%

79 Israel Phoenix Assurance 1 PHOE1 IT 0.26%

80 Audiocodes Ltd AUDC UQ 0.26%

81 Clal Biotechnology Industrie CBI IT 0.26%

82 Gilat Satellite Networks GILT IT 0.25%

83 PLURISTEM THERAP PSTI UQ 0.25%

84 Jerusalem Economic Corp ECJM IT 0.24%

85 Matrix MTRX IT 0.24%

86 DSP Group DSPG UQ 0.23%

87 Oil Refineries Ltd ORL IT 0.23%

88 Bayside LandCorp 1 BYSD IT 0.22%

89 FIBI Hldgs FIBI IT 0.22%

90 Mivtach Shamir Hldgs Ltd MISH IT 0.21%

91 Al-Rov (Israel) Ltd ALRO IT 0.20%

92 Perion Network Ltd PERI UQ 0.20%

93 FOX WIZEL LTD FOX IT 0.20%

94 Sapiens Intl Corp SPNS UQ 0.20%

95 Alcobra Ltd ADHD UQ 0.19%

96 Medgenics Inc MDGN UA 0.19%

97 Elco Hldgs ELCO IT 0.19%

98 Attunity Ltd. ATTU UQ 0.19%

99 Wix.com Ltd WIX UQ 0.19%

100 Property & Building Corp PTBL IT 0.18%

101 Ceragon Networks [US CRNT UQ 0.16%

102 Babylon Ltd. BBYL IT 0.09%

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BlueStar Israel Global Index Q1 2014 Performance Attribution and Differentiators

BIGI Internal Characteristics Attribution

Currency Attribution Exchange-Related Attribution


BlueStar Israel Global Index Constituent Attribution vs Peers

Total Index Weight Listed on Local Exchange(s)

Mar. 31, 2014

Local Currency

Performance vs USD (Q1

2014)

Attribution of Currency

Performance to BIGI

Performance

Israel – New Israeli Shekel (TASE)

55.30% -0.55% -0.30%

US - US Dollar (NYSE, NASDAQ,

AMEX) 42.24% 0.00% 0.00%

UK – GB Pound (London)

2.15% 0.66% 0.01%

Poland – Polish Zolty (Warsaw)

0.30% -0.13% 0.00%

Total Direct Effect of Currency Fluctuation

on BIGI Price Level - - -0.29%

Total Index Weight as of Mar. 31, 2014

Attribution of Category to BIGI Performance (Q1

2014)

Dual-Listed Constituents

36.49% 4.88%

Constituents With No TASE

Listing 30.38% 1.83%

Technology Constituents

With No TASE Listing

24.27% 1.53%

Company Name

BIGI Weight Relative to MSCI

Israel Capped Index

Q1 2014 Positive Relative Weight

Attribution

VeriFone Systems Inc 2.67% 0.70%

Amdocs Ltd 5.06% 0.64%

Plus500 Ltd 0.48% 0.45%

Check Point Software 6.97% 0.34%

Bank Leumi -4.52% 0.21%

Opko Health 1.47% 0.15%

VERINT SYSTEMS 1.63% 0.15%

Babylon Ltd. -0.46% 0.15%

Clal Biotechnology 0.26% 0.15%

Imperva 0.94% 0.15%

Company Name

BIGI Weight Relative to MSCI

Israel Capped Index

Q1 2014 Negative Relative Weight

Attribution

Teva Pharmaceutical -10.06% -2.92%

Stratasys Ltd 2.76% -0.59%

Nice Systems Ltd -2.39% -0.19%

Israel Chemical Corp -3.77% -0.18%

BEZEQ -3.08% -0.15%

Delek US Holdings 0.86% -0.13%

Frutarom -0.82% -0.12%

Bank Hapoalim -6.04% -0.11%

LivePerson Inc 0.52% -0.10%

Playtech 1.08% -0.08%

6

Market Trends- Technical Analysis


The 2008/2009 lows connect with the lows put in during mid-2012 to form a strong channel of support, guiding BIGI higher over the past year.

LT Support: 195

MT Support: 245-250

MT Target 1 Met: 270-275

MT Target 2: 310-325

The two parallel trend lines connecting the tops in 2008 and 2011, and now 2014, in the chart above were confirmed in March and early April as the most significant area of interest in the long-term chart of BIGI. The highest of the two trend lines should serve as major resistance for the index in the short- to medium-term. At the present date, that line would also equal the measured target from the 2009 lows with respect to the 2012 low. If theses trend lines are broken, which we suspect they will be over the medium-to-long term, they will likely turn into a key support area for the index and serve as a strong base for this multi-year bull-market to continue onward from. For the time being, we must respect strong resistance, especially against a backdrop of the volatile global markets in Q1 2014.

Strong Support Area

~10-15% Below

Mid-Term Support: 1 255-260 MT Support: 2 240-245

MT Target 2 Met: 285 MT Target1/ ST Support Met: 275

Strong Support Area

~8% Below

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Technical Analysis: Top Five Holdings ( Jan. 2, 2012 - Apr. 14, 2013)

TEVA (14.80 % of BIGI)

Check Point Software (6.97%)

Bank Hapoalim (4.04%) Amdocs (5.06%)

Perrigo Co. (9.28%)


We closely follow chart patterns of the largest BIGI constituents. These chart patterns are revealing as to the direction of the broader index as an index is simply a sum of its parts. We provide charts for the five highest-weighted companies in the BlueStar Israel Global Index. The theme last quarter was “The Trend is Your Friend Until It Bends,” and the BIGI benchmark as well as its top five constituents were all trending higher heading into Q1 2014. The trend has bent in Perrigo and Check Point but Teva, Amdocs, and Bank Hapoalim still look strong.

50-Day Simple Moving Average 200-Day Simple Moving Average

Israeli Sector Spotlight

Information Technology

8


The Health Care Sector rose by nearly 5 percentage points during the first quarter of 2014. There are roughly 15 Health Care companies in the BlueStar Israel Global Index but the rally in the sector was not broad-based. In fact most of the gains were attributable to just four companies: Teva, Clal Biotech Industries, Taro Pharmaceuticals and Opko Health. Teva, the highest-weighted constituent in all major Israeli equity benchmarks rose by roughly 29% during the quarter. Teva’s stock was boosted by key court decisions in the U.S., new drug launches, less concern over immediate competitive threats to the company's most important products, and several positive analyst reports on the company. Unfortunately, rallies in benchmarks such as the rally during Q1 can be misleading. Unlike the rally in the Information Technology sector over the past few quarters, the rally in the Health Care Sector (and most major Israeli equity indexes) were not broad-based in Q1 2014. This means that one of the primary reasons the Health Care sector (and indexes like BIGI and MSCI Israel) posted such a large gain in Q1 was because of the rally in shares of Teva. This does not signal strength for a continued rally in the broader sector.

Health Care

GICS Sector Q1 2014

Performance Q4 2013

Performance Q3 2013

Performance Q2 2013

Performance Q1 2013

Performance

Health Care 4.97% 1.39% 1.14% -0.09% 2.08%

Information Technology 1.66% 3.34% 3.08% 0.10% 0.95%

Financials 0.51% 2.32% 2.06% -0.13% 1.13%

Materials 0.24% -0.10% -0.35% -1.47% 0.73%

Industrials 0.09% 0.87% 0.62% -0.03% 0.55%

Telecom Services -0.04% 1.37% 1.11% -0.07% 0.41%

Utilities -0.09% 0.09% -0.16% 0.02% -0.05%

Consumer Staples -0.15% 0.35% 0.10% 0.25% 0.20%

Energy -0.36% 0.67% 0.41% -0.85% 1.23%

Consumer Discretionary -0.38% -0.11% -0.10% 0.62% 0.38%

The Information Technology sector posted its sixth straight quarterly gain since the late 2012 lows. Similar to the Health Care sector though, the nature of the gains in the first quarter of 2014 were different than in the preceding periods. In the third and fourth quarters of 2013 we reported broad-based gains in the Information Technology Sector with 85-90% of the components of that sector posting gains. In the first quarter of 2014, only 18 out of 30 components posted gains which, while still a majority, signifies a bit of weakness in the sector. Silicom Limited, ClickSoftware, and Telit Communications where the three largest percentage gainers in the Information Technology sector during the first quarter. Silicom is a leader in high-performance networking and data infrastructure solutions designed to increase data center efficiency. ClickSoftware is a leading provider of work force management solutions and applications, specializing in the service sector. Telit Cmmunications is one of the three main players in the emerging Machine-to-Machine communications industry enabling new technologies from smart meters to driverless cars, trains and planes. Telit has thousands of customers globally, in a diverse range of industries.

Developments in the Corporate Arena and Capital Markets

Israel’s Global Footprint

A key source of Israel’s economic resiliency and growth is the ability of its companies to tap international markets and the government’s efforts to forge economic and security agreements with foreign governments and agencies. In the first quarter of 2014, several initiatives involving foreign companies or governments were launched, including: Lockheed Martin and EMC are setting up an Israeli Center for a cyber security project Israel Chemicals will develop an Ethiopian potash mine Israeli and Indian representatives are planning to launch a $40 million technology investment fund Trade representatives from the U.S. removed Israel from a list of countries that do not adequately protect intellectual property rights

The majority of Israel’s exports are to the U.S. and European countries. Nearly 20% of Israel’s 2012 exports were to Asian countries including China and India. While trade between Israel other Western countries is expected to rebound, Israeli policy makers sought to strengthen trade ties or begin free trade agreement negotiations with countries in Asia and Latin America during 2013. As Israel develops stronger trade ties with these regions in 2014 and 2015, Israel’s economy will become more diversified by export destination thus adding another layer of stability and potential for growth to one of the most important sectors of the economy, the export sector.

Capital Markets

The appreciation of the Shekel in 2013, relatively strong economic growth and low unemployment have reduced credit risk in Israeli debt markets and the TASE Non-Government Bond Index rose 2.38% in Q1 2014. The effect of the regulatory changes regarding Israeli corporate pyramids, which has served to reduce the risk of holding some Israeli corporate debt, is becoming more clear. Both Standard and Poor’s and Moody’s reaffirmed their high credit ratings on Israeli government foreign currency credit with stable outlooks during Q1/early Q2 2014. The resulting lower yields in government debt has permeated throughout the broader corporate and consumer credit markets.

9


The trend of quarterly increases in capital raised on the TASE and daily turnover in equities listed on the TASE in Q4 2013 continued into Q1 2014. In just the first three months of the year, companies raised $1.15 billion in equity and convertibles offerings which is half the amount raised in all of 2013. Additionally, average daily turnover on the TASE rose by 15% in Q1 2104 compared to the previous quarter. While these trends are quite positive, regulators and exchange officials are still exploring ways to induce more listings and liquidity on the TASE and to attract some of Israel’s most exciting private companies to chose the TASE over an international exchange such as the London Stock Exchange of the NYSE for

Number of Listed

Companies

2014/2013

Market Cap (USD)

Mar. 31, 2014/Dec.

31, 2013

Average Daily

Turnover (USD

mm) 2014

YTD/2013

488/508 218.7/203.3 Billion 370/324

Number of Public

Issues 2014

YTD/2013

New Capital

Raised (USD) 2014

YTD/2013

22/95 1.15/ 2.13 billion

TASE Equity and Convertibles Market Vitals at Mar. 31, 2014

their IPO. For example, the inter-ministerial committee for promoting investment in public R&D companies submitted a report to the Israel Securities Authority in January. The report made several recommendations for helping encourage high-tech companies to tap the TASE for financing. Methods for tapping the TASE for financing would include either an IPO for some of the larger companies, or by the establishment of public venture capital funds which would invest in smaller and earlier-stage companies. We also view BlueStar Index’s BlueStar Israel Global Index and BlueStar Israel Global Technology Index as setting a trend in attracting foreign investors’ attention to the investment opportunities in Israel, by offering investable benchmarks that reflect the true nature of the Israeli economy. BlueStar Indexes achieves this by including Israeli companies that are listed on exchanges other than the TASE, resulting in a much higher weighting in the Information Technology sector and other high-tech industries.

Israel Non-Government Bond Index (Jan. 2010 – Mar. 2014)

Shekel/Dollar

Israel GDP Growth Israel vs OECD Members

Source: OECD * Estimates as of Nov. 2013

Jan. 1, 2010 - Mar. 31, 2014

Shekel/Euro

Jan. 1, 2010 - Mar. 31, 2014

Israel Economic Review & Outlook

Israel’s GDP Growth Factors Israeli GDP is expected to grow 3.1% in 2014 which is lower that the previous estimates of 3.3%. In 2015, GDP is expected to grow by 3.0% as the effects of the natural gas program begin to taper off for the medium-term. The first quarter saw a decline in imports while a trend in export growth is beginning to emerge against the backdrop of a stabilizing-to-weaker currency and a pick up in global trade. Fiscal Policy and the Labor Market The government’s budget surplus, excluding net credit, was NIS 2.3 billion in February, consistent with the seasonal path towards staying within the deficit ceiling for 2014. There was a slight increase in the unemployment rate for January along with an increase in the labor force participation rate. Nominal wages increased by 0.20% while real wages declined by 0.10% between October and December, 2013. Inflation and Monetary Policy Inflation data that became available in March indicated that prices fell by approximately 0.20% in February with marked declines in food, clothing, footwear, and communications. Inflation forecasts by the Bank of Israel for the next 12 months were unchanged but inflation expectations derived from the capital markets declined to 1.6%. The Bank of Israel lowered its policy benchmark during the first quarter to just 75 bps. This comes at a time when the U.S. Federal Reserve is beginning to unwind its bond purchase program and, until the recent flight to safety in the U.S. capital markets, investors began indicating that they expected the Federal reserve to raise interest rates sooner than previously expected. This would mark a significant divergence in monetary policy between Israel and the U.S. If and when the U.S. equity market correction turns around, and U.S. interest rates rise again, this would have a ripple effect on the Israeli economy via real inflation and the Shekel. New Israeli Shekel Performance The Shekel weakened by approximately 50 bps vs the U.S. Dollar and by approximately 65 bps vs the Euro during the first quarter of 2014. The upward pressure on the Shekel has diminished and could be on the verge of changing course. The standard deviation of changes in the Shekel-Dollar rate declined in March but implied volatility derived from OTC Shekel-Dollar options has been increasing, indicating expectations for a bigger move by the Shekel in the months ahead. While a strong local currency lowers discount rates in the capital markets, boosts purchasing power and lowers real inflation, the strong shekel has had a noticeable negative impact on Israeli exporters. However, the Bank of Israel is seeing an uptick in exports and is increasing its forecast for 2014 export growth. We believe the increase in export growth forecast is due in part to a pick up in global trade but also because the Bank of Israel believes the shekel’s appreciation is either over or will be less dramatic than it has been over the past few years.

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Israeli Equities Amidst Global Economic

and Regional Geopolitical Events

(July 1997 – March 2014)

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Documents

BlueStar Israel Equity Update€¦ · The BlueStar Israel Global Index rose 6.72% in Q1 2014 while the TA-100 rose 5.64% and the BlueStar Israel Global Technology Index rose 5.78%