BlueStar Israel Equity Update August 2013

Transcription

1 BlueStar Israel Equity Update August 2013 This monthly column produced by BlueStar Global Investors discusses Israeli equities traded worldwide. The relevant benchmark for our review is the BlueStar Israel Global Index ( BIGI or BLS:IND on Bloomberg), which we believe represents the complete opportunity set of Israeli equity investments. Israel has one of the most resilient economies in the world and its technology sector plays an integral part in the global technological revolution. Yet few are aware of the global footprint of Israel s companies in other sectors, and fewer still know how to make their knowledge of the Israeli economy actionable. This column helps investors gain insight into the macro forces (including the geopolitical environment under which Israel s economy operates) and the individual company investment opportunities that have contributed to global Israeli equities outperformance of U.S. equities by more than five-fold over the past two decades. The opinions expressed in this column are those of BlueStar Global Investors, LLC. and should not be interpreted as a recommendation to buy or sell any security. Readers should consult with a financial professional before investing. Just What I Needed August 5, 2013 Israeli Global Equities were up sharply in July in line with other developed equity markets. Israeli Global Equities consolidated within the context of an uptrend throughout the second quarter but decisively broke out to the upside in July. Earnings from many Israeli Global Equities showed that positive trends in Q earnings continued into the second quarter: notable earnings beats or increased earnings outlooks reports came from Check Point, Amdocs, SodaStream and Orbotech. Teva s earnings announcement, however, was disappointing, and Israel Chemicals is facing strong secular headwinds. Many Israeli Global Equities, including most TASE-listed stocks, will be reporting in August. The volatility in global equity markets over the last several months diminished in June, allowing the underlying bullish nature of global equity markets to emerge in July. Until the U.S. Federal Reserve begins its tapering process, investors should expect periods of sharply increased volatility within the context of a bull market. In June, Israeli Global Equities faced headwinds on the home front as GDP estimates came in and as the markets digested the potential impact of the shrinking government deficit along with the effect of the rising shekel on industrial exports. The government s budget deficit already began shrinking in July and, though we do not yet know who the next governor of the Bank of Israel governor, he or she will likely be supportive of the manufacturing and export sectors. The former headwinds of fiscal contraction and shekel appreciation may turn to tailwinds before we know it. Lastly, government bond yields moved lower, lending to the corporate sector increased, and both local and foreign investors are moving funds back into the domestic equity market, though trading volumes on the TASE are still low. As fiscal and monetary stimuli move out of the spotlight, the current and next few earnings seasons will be the most important determinants in the continuation or reversal of the bull market in developed market and Israeli equities. We are noticing and will continue looking for signs that corporate capital expenditures, especially by global technology giants, on upgrading or implementing new technologies is firming up considerably. This signals that companies are more confident in the current business environment, and that many global technology giants are planning new product launches or expect a near term rise in consumer technology demand. BIGI (BlueStar Israel Global Index) Performance Versus the TA-100 and S&P 500 Indices Since Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q TA-100 S&P 500 BIGI Developments in Israel s geopolitical situation and outlook was neutral to net positive in July. Not much has changed in that the civil war in Syria is continuing and it seems doubtful that the new Iranian president will bring any new policy or disposition towards Israel. However, the Egyptian Army has done well in smoldering much of the chaos in the Sinai which was threatening Israel and in destroying Gazan tunnels which were being used to smuggle rockets and other weaponry. Economic relations with Turkey are nearly back to normal, especially in defense-related trade and cooperation. The European Union declared Hezbollah a terrorist organization but it also published guidelines regarding policy and funding support of Israeli institutions in settlement territories. Militants in Gaza fired one rocket into Southern Israel in July BlueStar Global Investors, LLC These are not recommendations to buy or sell any security 1

2 BIGI June 2013 Performance and Biggest Gainers and Losers Global Equity Benchmark Comparison: July 2013 Benchmark July 2013 Performance BIGI 4.52% TA % MSCI Israel 2.86% S&P % MSCI EAFE 5.32% MSCI EM 1.32% Source: BlueStar Global Investors LLC Israeli Global Equities--as measured by BIGI--outperformed other Israeli equity benchmarks and emerging market equities by a wide margin in July and in-line with global developed market equities. BlueStar pays close attention to the performance differentials between the various Israeli equity benchmarks and other global equity benchmarks. The relative performance of the BlueStar Israel Global Index, which is composed of approximately 70% Israel-listed securities and 30% foreign-listed securities, is significant. Israel s two largest export markets are the U.S. and Europe, but its exports are well diversified and its goods and services are exported to Asia, South America and Africa. Therefore, the BlueStar Israel Global Index, though tightly correlated to the TA-100 and TA-25 indexes, is more correlated to other global equity benchmarks than are the TA-100 or TA-25. Despite the relatively higher correlation and strong performance of the BIGI benchmark in July, the performance differential between Israeli and U.S. equities is still near the largest it has been in quite some time. The relative underperformance by Israeli Global Equities began in mid It was triggered by increased rhetoric about a potential Israeli attack on Iranian nuclear facilities and exacerbated by other geopolitical events, including the Israeli operation in Gaza in late However, the relative underperformance of the technology sector in 2012 (including Israeli, U.S., and other technology stocks) and interest-rate differentials between the U.S. and Israel have also played a role in the relative underperformance of Israeli Global Equities. We maintain the stance that, if information technology and health care stocks, the two largest sectors in the BlueStar Israel Global Index, continue to outperform (in conjunction with pro-export policy in Israel), the BlueStar Israel Global Index will be poised to catch up to U.S. and other global equity markets and to outperform other Israeli equity indexes over the next several quarters. Top Global Israeli Equity Gainers and Losers: July 2013 Top-Performing Israeli Stocks June July 2013 Worst-Performing Israeli Stocks July 2013 Discount Investment Corp 32.03% Israel Corp % Babylon Ltd % Israel Chemical Corp % BEZEQ ISRAELI TELECOM CORP 21.00% Clicksoftware Technologies Ltd % Cellcom Israel Ltd % Africa-Israel Inv Ltd % Partner Communications Co Ltd 20.09% SodaStream International Ltd % Caesar Stone Sdot Yam Ltd 19.13% DSP Group % Ezchip Semiconduct 17.85% MELLANOX TECH -7.78% MELISRON Ltd % Mazor Robotics Ltd % Taro Pharmaceutical Industries 17.19% Givot Olam Oil Exploration L.P % Audiocodes Ltd 15.80% Ceva Inc -5.84% Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms 2

3 Israeli Sector and Equity Performance Sector (As Defined by FTSE) July 2013 Financials 1.35% Health Care 1.13% Energy 0.59% Industrials 0.46% Consumer Staples 0.44% Consumer Discretionary 0.23% Telecommunications Services 0.21% Information Technology 0.20% Utilities 0.20% Materials -0.50% The Health Care sector was among the best performing groups of Israeli Global Equities for the second month in a row. Israeli Global Health Care stocks were lead by Taro Pharmaceuticals (TARO: NYSE), Kamada (KMDA:TASE, NASDAQ), and Given Imaging (GIVN:TASE, NASDAQ), which were up 17%, 11%, and 11%, respectively. Additionally, the price action in Perrigo (PRGO: NYSE, TASE) was very strong in July, which is what we were looking for in last month s column, rising nearly 12% from about $121/share to $135/share before pulling back sharply on news of the company s acquisition of Ireland s Elan. There was big news for Given Imaging in July, when Japan s Pharmaceuticals & Medical Devices Agency approved the use of its ingestible pill-sized camera for diagnosing colonic disease. (The device is used instead of a colonoscopy). The Japanese market is one of the largest health care markets in the world and Given Imaging has been seeking this approval for years. The event is a catalyst for Given Imaging s stock and a potential inflection point for the company s financial performance. July s rally was broad-based. It was lead by the Financials but all three major Telecommunications Services stocks in the BlueStar Israel Global Index rallied: Bezeq (BEZQ:TASE), Partner (PTNR:TASE, NASDAQ), and Cellcom (CEL:TASE, NYSE). The fiber-optic venture throughout the country, as well as a reduction in the intensity of competition in the industry, are providing support for stocks in this sector. Israeli Financials stocks are most tightly correlated to the performance of the domestic economy, the corporate and consumer spending environment, the housing market, and interest rate and foreign exchange market developments. Israeli Financials stocks include many of the large corporate pyramid holding companies which are under serious scrutiny by government committees focusing on increasing competitiveness in the economy. Regulators will be forcing holding companies to split financial and non-financial holdings and limiting pyramids to only two levels. We expect to see increased M&A activity, though we are unsure if such forced M&A will be additive to stock valuations. In the Spring we began to articulate the potential for Israeli Global Equities to be among the leading global equity markets going into the second half of We reiterate our reasoning: Israeli GDP projections earlier in 2013, we thought, dismissed the possibility of stronger-than-expected economic growth in two of Israel s largest trade partners, Europe and the U.S. Though the Shekel is likely to remain strong (negatively impacting Israeli export industries) until there is an actual change in policy and further intervention in the foreign exchange markets, we believe it reached its peak in the short to medium terms and that officials responsible for Israel s economic management will make the right decisions to support Israel s export sector. In April, we began discussing how earnings reports and outlooks from some of Israel s behind-the-scenes technology companies and some prominent global technology giants were pointing to a revival of the under-performing technology sector. Indeed, over the past couple months, the Information Technology and Health Care sectors have taken a leadership position on a relative basis, both in Israel and in the U.S., and in other global equity markets. On the following page we review the highlights in Israeli Information Technology stocks over the past several months. 3

4 Israeli Sector and Equity Performance In April: Orbotech (ORBK: NASDAQ; supplier of equipment to a great majority of large and medium-sized consumer electronics companies in the world) announced earnings for Q which beat both revenue and earnings expectations with an upbeat outlook. DSP Group (DSPG: NASDAQ) reported strong earnings and revenue growth for Q in a return to profitability and a demonstration of its successful turnaround. DSP Group is also a supplier to many telephony companies and companies involved in cloud, VoIP and home gateway products. Intel and Microsoft both reported better-than-expected earnings and positive outlooks. In May: Orbotech, EZchip (EZCH: TASE, NASDAQ), Ceva (CEVA: NASDAQ) and Allot Communications (ALLT: TASE, NASDAQ) were among the leading Israeli Global Equity performers. NICE Systems (NICE: TASE, NASDAQ) reported top and bottom line growth for Q Cisco (CSCO: NASDAQ) reported earnings that beat expectations with a very positive outlook. Several smaller Israeli companies are suppliers to Cisco, including EZchip. In June: Ceva, Imperva, Allot Communications, Click Software (CKSW: NASDAQ), and Orbotech were among the leading Israeli Information technology companies. Each of these companies is involved in supplying products or solutions related to next generation technologies. EZchip announced that business is improving and is holding talks with potential customers of its new products but did not update its Q guidance. Mellanox (MLNX: NASDAQ) announced that it won a $200 million deal to supply Microsoft (MSFT: NASDAQ) and Google (GOOG: NASDAQ) with equipment to aid in cloud and server farm build-outs. Stratasys (SSYS:NASDAQ) acquired desk-top 3D printer company MakerBot. In July: Amdocs (DOX:NYSE) reported strong revenue and profit growth which beat analyst estimates. Also, both Check Point (CHKP:NASDAQ) and Orbotech (ORBK:NASDAQ) reported strong earnings and, more importantly, that a large portion of revenue growth is being driven by large orders and that payment collections are taking less time. Additionally, for the second quarter in a row, Orbotech raised its outlook and spoke about a strong revenue pipeline. Orbotech also said that many of its key customers (many major consumer electronics stocks) are planning key product launches in the second half of Imperva (IMPV:NASDAQ) has been one of the best performing Global Israeli Information Technology stocks, driven by a surge in capital expenditures by many companies on data center security, though the company has not reported Q2 earnings. As of the writing of this column, the stock s price action points to a positive earnings report. Also, Click Software (CKSW:NASDAQ) reported lowerthan-expected revenues and earnings and lowered its 2013 outlook. Management said that the shift to the cloud is occurring sooner than expected snd the company was unprepared for the timing of this shift, though it should be a positive for the company s long term potential. Finally, Stratasys (SSYS:NASDAQ) competitor, 3-D systems (DDD:NYSE) reported very strong revenue growth which we view as a positive indicator for Stratasys as we approach the Israeli company s Q earnings report. All these developments suggest that major global technology companies are now investing in their own infrastructure or supply chain in order to support the next wave of the technology revolution around the world, whether it be cloud-based services, content delivery solutions or 3D printing. Companies such as Microsoft, Google, Intel and Cisco are likely to make such investments in anticipation of increased business activity in the near future. The weakest link in sentiment towards Israeli Global Equities and Israeli GDP growth is the export sector. We thus believe that the Israeli Global Equities that tilt toward exportoriented sectors have the greatest likelihood of surprising and outperforming moving into the second half of 2013 and early We would caution that neither a bull market nor turnaround in global or Israeli Health care and Technology stocks has been confirmed; these sectors relative leadership roles have become more apparent, and we continue to monitor this investment thesis. Continuation of the first quarter s generally positive earnings results, forecasts, and backlogs into Q2 and Q3 is helping to confirm this trend. Weakness in European demand for technology products is the most likely risk factor to delay the aforementioned rebound. Lastly, as stated earlier, Financials stocks will play a crucial role in supporting any bull market in Israeli Global Equities, though the rise may be lead by Israeli exporters (Information Technology, Health Care, and Consumer Stocks). 4

5 Israeli Sector and Equity Performance The sharp appreciation of the Israeli Shekel has been partly attributable to speculation that the commencement of natural gas deliveries to Israel and the future of the Oil & Gas sector will cause Balance of Payments surpluses. This and other analysis in our autumn 2011 essay on the effect of Israel s natural gas industry on the rest of the economy and region-- The Economics and Politics of Israel s Offshore Energy Discoveries -- remains valid, and we encourage readers to revisit that article by clicking on the link above. Energy independence alone will be a boon for the Israeli economy, by way of sharply reducing net exports, and Israeli Global Equities. Anything above and beyond energy independence by way of exports, in our opinion, would be icing on the cake and further propel Israeli economic growth and stability. As we have stated repeatedly: holding an overweight position in Israeli energy equities and LPs will aid in insulating investors from lower-than-expected economic growth in Israel [outside the oil & gas sector]. Additionally, though this sector currently holds a small weight in the BlueStar Israel Global Index, the weight will likely grow over the years and decades to come; overweighting smaller growth sectors, we believe, is a prudent long-term investment strategy. Investors with access to the local exchange should inquire on tax consequences of non Israeli citizens holding locally-listed Limited Partnership units. It should be noted that the natural gas industry, which is part of the Energy sector, is expected to contribute 90 bps to Israeli GDP growth in 2013 and 50 bps to 2014 growth. Thus, the remaining components of GDP, especially government expenditures, may be weaker than in the past several years. Also for that reason, we d say a long- term overweight in the Energy sector would be a prudent way to insulate one s Israel Global Equity exposure from weaker-than-expected economic growth. Energy sector highlights in June include: Woodside withheld a $696 million payment to Leviathan partners after the government announced it would allow only 40% of Israel s gas reserves to be exported. Woodside is considering joining a Cypriot consortium to build an LNG plant there, rather than in Israel. IEC will likely convert its Hadera power station to natural gas and purchase nearly 2 billion cubic meters of gas per year for 15 years from Leviathan partners, a deal potentially worth $600 million per year. Modiin Energy increased estimates at the Yam Hadera prospect to 208 million barrels of oil and 3.4 TCF of natural gas. Projections on oil in the Leviathan field state that there may be 1.5 billion barrels of oil there. Total is considering buying Cyprus Block 12 rights from Noble Energy and Delek Group. Dorad, an independent power producer, is now hooked up to the national electricity grid, which will help IEC meet the heavy summertime electricity demand. 9.00% Israeli Net Exports as a Percent of GDP with and without Fuel ( ) 7.00% 5.00% 3.00% 1.00% -1.00% -3.00% Net Exports %GDP (Excluding defense, ships, and aircraft) Net Energy Imports % GDP Net Exports % GDP less energy imports % GDP -5.00% -7.00% -9.00% Source: BlueStar Global Investors; BOI 5

6 Market Trends- Technical Analysis The BlueStar Israel Global Index has been trending beautifully from a technical point of view. Technical analysis of the BIGI price index (BLS:BB) can provide useful insight into Israeli Global Equity market participants desire to buy or sell Israeli Global Equities. We began conducting technical analysis on the index in early 2012 and we have witnessed the development of many of the price-levels and chart points that have played a crucial role in BIGI s recent breakout. In the six year chart on the following page, we see that long-term support for BIGI is represented by the thick red line which occurs near the 195 index level. The zone between 195 and 205 has been established as a major technical zone dating back to the pre-financial crisis days in The most recent test of the 195 level, in late spring 2012, helped us form the upward channel, represented by the two upward sloping solid black trend lines, which has proven to be a major source of support for the upward trend which began in late The long-term outlook for Israeli Global Equities first became bullish as the index re-entered and eventually broke through this channel in Q3 and Q Additionally, the thin solid green line, whose origin dates back to mid-2007, has also been a key technical indicator over the past six years, acting mainly as resistance for Israeli Global Equities. This resistance line was broken in June/July After breaking an important downward trend line (just prior to Operation Pillar of Defense), represented by the downward sloping black trend line in the shorter- term three year on page 8, BIGI reached short-term resistance at the 220 level. The market sell-off during Operation Pillar of Defense to the 200/205 level confirmed that this is a significant medium-long term resistance level for BIGI. At the time, the 205 level coincided with the lower line of an upward channel, represented by the two upward sloping black trend lines. This proved to us that this channel/ trend lines could be relied upon as strong support. We waited patiently as BIGI consolidated following the rebound from the lows during Operation Pillar of Defense between the two solid thin red lines. Finally, after the third test of the lower band (represented by the number 5 ) of this consolidation zone, which coincided with the aforementioned black trend line, the index broke out above the upper band of the resistance zone. We viewed this breakout as a major one which we d been anticipating for many months and which confirms our bullish bias towards the market. Near the Q lows, we began recommending an over weight in Israeli Financials and Oil & Gas companies, which did in fact lead Israeli Global Equities higher through the beginning of However, during the consolidation over the past several months, we have been recommending an equal to underweight in those sectors and a rotation into Israeli export-oriented sectors, namely Information Technology and Health Care. As we will see after examining momentum indicators for BIGI, the Information Technology and Health Care Sectors have indeed lead the Israeli Global Equity market s recent break out. Since May 2013, we have been looking at the BIGI price action in conjunction with simple moving average: we ve compared the 30 day SMA to the 100 day SMA as well as the 50 day SMA to the 200 day SMA. At the end of June, we noted that BIGI probed below both the 30 and 100 day SMAs, though the 30 day did not cross below the 100 day. We noted then that the consolidation in BIGI through June, after a strong up month in May, allowed for the 30 and 100 day SMAs to sufficiently catch up to the index price level and that another move higher may be imminent. Additionally, at the end of May, we noted that the 50 day SMA appeared to have gotten too far ahead of the 200 day SMA and that a consolidation or even a pull back may be warranted. Indeed, the index pulled back in June, the gap between the 50 and 200 day SMAs narrowed, and the index sub sequentially rallied in July. In the last few days of July and early August, the index proceeded to pull back slightly to retest the area from which it broke out: once again, no stock or index goes up in a straight line- BIGI once again pulled too far ahead of its moving averages on the break out and a period of consolidation is once again likely. Based on both the six-year and three-year charts, originating in 2007 and 2010, respectively, as the index decisively broke above the resistance line at around 238, we d expect BIGI to reach the 300 level by the end of 2013 or beginning of 2014 most likely after hitting resistance between 255 and 260 and a consolidation between 270 and 280. In the very near term (2 weeks to 2 months) our outlook remains bullish, but we would suggest waiting for any pullbacks to add to a long position, such as the one we ve gotten in the last days of July and early August. Risk parameters for those with a short-term time horizon should view a daily close below the 228 level, which would currently indicate a break below both the upward trend line and lower band of the recent support zone, as a sell signal/initial stop loss. If this occurs, then a weekly close below the 220 level, from which BIGI broke out in December 2012, would be a secondary stop-loss level. For those with a longer-term view, a break below the 220 level should act as a warnings sign or initial stop loss. A weekly close below 195, however, would shift the longer-term outlook dramatically and any rallies should be sold. Given the decisive breakout early in this quarter, we consider the probability of a major drop like this (to the 195/200 level or below) quite unlikely, especially as key global markets have recovered strongly following the late-spring/early-summer tapering scare regarding U.S. monetary policy. Our technical outlook for Israeli Global Equities is solidly bullish and, now that an ETF is tracking the BIGI benchmark, investors have an efficient vehicle to implement their views. 6

7 Market Trends- Technical Analysis Source: BlueStar Global Investors LLC (January July ) Source: BlueStar Global Investors LLC (January July ) 7

8 Market Trends- Technical Analysis 5 Source: BlueStar Global Investors LLC (Jan July ) Source: BlueStar Global Investors LLC (Jan July ) 8

9 Economic & Fundamental Outlooks Economic indicators and forecasts for Israel have deteriorated over the past few months. The consumer confidence index fell by 22.2 points in May and another 3.1 points in June to levels close to where the index was during the peak of the global financial crisis in The industrial production index rose by 0.1% in June while manufacturing exports remained flat. However in July concerns over a continued slow down in economic growth in Israel were reduced, as economic growth is expected to continue at the moderate rates of the past couple of years. The budget deficit narrowed in June to 4% of GDP for the twelve months ending June 2013 from 4.5% of GDP for the twelve months ending April The government budget deficit was NIS 7.7 billion, nearly 40% below the path consistent with the deficit ceiling set by the government for 2013 of 4.65% of GDP. Spending by government ministries was still up, though by 4.3% in the first half of 2013 versus the first half of Tax revenues rose to NIS 19.4 billion in June 2013 from NIS 16.4 billion in June The treasury cancelled a proposed homebuyers tax which would impose a 3.5% purchase tax on all home purchases except for first time home purchases. We quote from last month s column: The two greatest wild cards (now that we ve gained some clarity about government expenditure) in considering Israeli GDP growth are in the investment/capital formation and net exports components. Investments in fixed assets totaled 19.2% of GDP in 2012, but this heightened level was due largely to one-time projects. While this doesn t bode particularly well for GDP growth in the near term, we re hopeful that the higher level of fixed investment in 2012 has been deployed into capital and growth-generating assets, which eventually have a wealth effect on the economy. In June, Israel s Ministry of Finance changed its tune on export expectations. It now expects a rebound in Israeli net exports beginning in 2013 into 2014, in line with global trade growth. The growth in the imports component of net exports is expected to slow in large part due to the flow of natural gas from Tamar. The OECD expects Israeli GDP growth to be 3.9% in 2013 and 3.4% in While the estimate for 2014 GDP growth has been lowered due to the government budget, Israeli GDP growth is still expected to be far above the OECD average and closer to some of the major emerging market economies. The Bank of Israel kept its policy interest rate for August unchanged at 1.25%, for the second month in a row, which is a record low rate. The reasons cited for this decision were: inflation expectations for the next year below the mid-point of the target inflation range; stable domestic economic growth forecasts; downward global economic growth forecast revision by the IMF, especially in Europe and emerging markets; and a continuation of shekel strength and rising mortgage lending. These economic forces and global monetary easing will make it difficult for BOI officials to raise interest rates soon. In June, we discussed at length the significance of Mellanox s delisting its shares from the Tel Aviv Stock Exchange in order to save costs and avoid additional regulatory burdens. The liquidity on the TASE has continued to be poor in the years since the country s reclassification to Developed Market in There may be an emerging trend, concerning to many, of major Israeli companies and new issues listing their shares on foreign exchanges instead of the TASE. There is currently a major shake-up at the executive level at the TASE. The TASE has submitted proposals to improve trading volumes including proposals to: ease capital requirements for TASE members, which would allow non-bank TASE-members to expand trading activity, and to collaborate with major foreign asset management firms to launch Israel-focused investment vehicles on foreign exchanges. The break-up of corporate holding structures in Israel is a criticallyimportant issue that will affect the TASE as well as the broader Israeli economy. On one hand, the free-float adjusted market capitalization of many companies on the lower tiers of Israel s corporate pyramids will rise dramatically. This will be a positive event for Israeli capital markets that could lead to a rise in Israel s ranking within global equity indexes such as MSCI and FTSE. Both index and active portfolio managers who are benchmarked to these global indexes could then allocate more funds to Israeli equities. On the other hand, the controlling shareholders of corporate pyramids may choose to merge some of the small companies in the lower levels of these pyramids or sell them outright. The worst case scenarios would be: 1- the smaller companies would be merged into larger companies which would result in a reduction of the number of listed companies on the TASE and no increase in the free-float adjusted market capitalization of Israeli equity indexes; or 2- that these smaller companies would be sold off to larger international companies, again reducing the number of companies listed on the TASE, but also reducing the overall market capitalization of the TASE. In July, Idan Ofer, the controlling shareholder of Israel Corp., planned a 2 billion GBP offering on the London Stock Exchange of Israel Corp. shares as he planned to split up the company. Israel Chemicals and Oil Refineries shares would remain listed on the TASE but the new Israel Corp., which would be listed in London, would include Zim Integrated Shipping, Tower Semiconductor, IC Power, and Qoros. 9

10 BlueStar Israel Global Index Overall, we maintain our medium- and long-term bullish outlook for Israeli Global Equities, especially after the recent break out. Positive sector-driven, geopolitical, and macroeconomic developments, along with our technical analysis view of the global Israeli equity market, lead us to remain bullish on global Israeli equities in the medium-long term. We see a positive risk-reward relationship despite the ever-present geopolitical currents in the Middle East. We assign a higher probability of Israeli Global Equities breaking upwards in the near-term, though volatility will continue to be present until the timing and pace of the tapering of global monetary expansion is clear. We remain very cautiously optimistic in the near term. U.S. vs Israel Equities (1997 June ) Source: BlueStar Global Investors Amidst significant geopolitical and global economic challenges, Israel s economy continues to outperform its OECD peers, as well as many Emerging Markets. Its equity market has, unsurprisingly, been buffeted by Europe s economic crisis and the global downtrend in stock markets. However, the long-term attraction of Israeli stocks remains intact, and the global nature of Israel s equity market makes it naturally diversified vis-à-vis regional tensions in the Mideast. We continue to believe that a broad selection of Israeli stocks provides exposure to both global and domestic economic growth. Such broad-based Israeli equity exposure potentially offers the best of both worlds -- Developed Market stability, and the demographics and growth potential of an Emerging Market. Israel Benchmark Sector Exposure (June ) Sector BIGI MSCI - FTSE EIS Israel TA-25 TA-100 Info. Technology 30.5% 10.2% 7.1% 5.4% 8.9% Health Care 26.3% 24.5% 48.6% 20.6% 23.8% Financials 18.6% 31.9% 21.4% 33.2% 31.7% Energy 7.1% 4.5% 3.9% 14.3% 10.9% Materials 6.6% 12.3% 8.5% 11.7% 9.7% Telecom. Services 3.3% 7.3% 5.2% 9.5% 6.5% Industrials 2.8% 4.9% 2.7% 2.5% 4.6% Consumer Discretionary 2.3% 0.6% 0.4% 0.0% 0.8% Consumer Staples 2.1% 3.9% 2.2% 2.7% 3.2% Utilities 0.5% 0.0% 0.0% 0.0% 0.0% Israel vs Global Benchmarks Long Term Performance 2013 BlueStar Global Investors, LLC These are not recommendations to buy or sell any security YTD 6/28/13 1yr. 3yrs. 5yrs. 10yrs. 15yrs. ACWI 9.18% 6.98% 15.85% 20.94% 16.55% 17.02% EAFE 13.14% 9.51% 18.30% 22.98% 18.20% 18.03% MSCI EM 9.69% 11.45% 20.86% 27.78% 24.02% 25.00% S&P % 6.74% 13.57% 18.42% 14.58% 16.15% MSCI Israel 8.05% 10.87% 19.58% 21.46% 18.93% 24.50% TA % 10.02% 19.15% 24.86% 21.92% 24.72% TA % 10.67% 19.71% 24.73% 22.09% 24.97% BlueStar 5.57% 6.90% 19.05% 23.76% 20.35% - 10