Merrill Lynch analysts find that as Israel's economy is healthy, it will recover from the recession in less spectacular form than many emerging market economies. The MSCI upgrade to developed market status (scheduled for May 2010) will not have an impact this year, but will only begin to be felt in the first quarter of 2010.
Merrill Lynch's Haim Israel, Micha Goldberg, and Turker Hamzaoglu say today that there will be no "V-shaped" sharp recovery, and that 2010 GDP growth will only be 2.5% higher than in 2009. This is lower than for countries such as Russia, where 2010 growth is forecast to be 9.7% higher than this year's, and Turkey, with 2010 growth forecast to be 8% above its 2009 rate.
Merrill Lynch believes that with rising inflation expectations, and low interest rates, domestic investors have been pouring money into the Tel Aviv Stock Exchange (TASE), calling domestic liquidity a key driver of TASE performance so far this year. They calculate that local investors put an additional NIS 25 billion into TASE securities in the first half of 2009, which accounts for about 20% of total turnover.
Israeli institutional investors have about 10.9% of their assets under management in equities, and 5.8% in cash. In June 2008, before the economic crisis began, those investors had about 12% in equities, so there could be additional inflows into the stock market. Merrill Lynch says investors could allocate another NIS 25-30 billion to equities.
M1, a measure of money supply, rose 60% since June 2008, and a wider measure, M2, was $100 billion in June. Merrill Lynch says that even if only 10% of that money returns to the stock market, it could propel the market another 20-30% higher.
The research unit at Merrill Lynch expects Bank of Israel to raise the interest rate to 1.5% by the end of the year. The analysts feel that with "sticky" inflation in Israel leading the Bank of Israel to continue to raise rates, interest rates will rise 225 basis points through 2010.
Merrill Lynch continues to forecast a strengthening shekel, citing it as an additional handicap for Israel's economy. With 40% of Israel's exports headed to the US, a stronger shekel (and softer global demand) can hurt corporate profits for Israeli companies. The bank says the high tech sector can be especially affected, since it records revenue in dollars, but costs - such as salary and rent are in shekels. Interest rate hikes can also strengthen the shekel.
The analysts project the shekel-dollar exchange rate to reach NIS 3.4/$ by the middle of 2010, and to end 2010 at NIS 3.45/$.
Merrill Lynch was bought by Bank of America in 2008 and is now a wholly-owned subsidiary of the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on September 7, 2009
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