Israeli Equities Gain Momentum in July and Extend their Outperformance vs Developed International Stocks

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1 Aug 14, 2018 ISRAEL EQUITY REVIEW & OUTLOOK What s Inside 1. Key Insights 2. July Performance and Economic Highlights 3. Domestic vs. Globally-Oriented Israeli Stocks 4. Technical Analysis of Israeli Equities About BlueStar Indexes BlueStar Indexes is a leading provider of research and investment solutions for the Israeli capital markets. BlueStar has been producing monthly market updates on the Israeli market since In our Israel Equity Review and Outlook we provide data and insight on recent performance of Israeli equity benchmarks, stocks and sectors driving performance, key economic data for the Israeli market, as well as technical analysis of our equity indexes. The BlueStar Israel Global Index (BIGI or BLS & BLSTR INDEX on Bloomberg) is the broadest and deepest benchmark for Israeli equities trading worldwide in Tel Aviv, New York, London, Singapore and Australia. The VanEck Vectors Israel ETF (ticker ISRA) tracks BIGI and is listed on the NYSE. In addition, Israel-domiciled investment vehicles tracking BIGI are offered by Psagot and IBI. The BlueStar Israel Global Technology Index (BIGITech or BGTH & BGTHTR INDEX on Bloomberg) is the broadest and deepest benchmark tracking the performance of Israeli companies operating in innovative sectors like information technology, defense technology, clean technology and bio-technology. The BlueStar Israel Technology ETF (NYSE ticker: ITEQ ) tracks BIGITech. In addition, there are two Israel-domiciled investment vehicles tracking BIGITech managed by KSM/Excellence. BlueStar also maintains five additional Israel Equity Indexes (BIGI -TIM, IGEI, IDEI, BIGI -SD and BIGI -SV), one Israel Government Bond Index (BIGUSD), and nine Global Thematic/Tech Equity indexes. Approximately $390 million in index-tracking assets are benchmarked to BlueStar Indexes as of end-july Israeli Equities Gain Momentum in July and Extend their Outperformance vs Developed International Stocks Highlights (as of July 31, 2018): Israeli Stocks continued their 2018 outperformance of Developed International Equities, extending its lead over EAFE in July by an additional 1.18%. The BlueStar Israel Global Index (BIGI ) added 3.64%, reversing June s slight decline, bringing its 2018 YTD performance to 6.78%, which is 7.14% above EAFE s % YTD return. Israeli technology stocks, as defined by The BlueStar Israel Global Technology Index (BIGITech ), were up 2.8% in July, led by key small-cap holdings, adding to the BIGITech s impressive YTD performance of 11.03%. This year BIGI is outperforming the local TA-125 Index by 9.22%, as the TA-125 has missed out on the performance of some of Israel s top foreign-listed technology stocks. Furthermore, the rebound in shares of some of Israel s largest companies has added to performance, including Teva Pharmaceuticals up 26.33% YTD. The technical outlook for BIGI indicates that it is at a critical inflection point, on the cusp of turning bullish. Momentum in the technical outlook for BIGITech indicates a clear bullish trend, with newly established support levels both tested and confirmed. FIGURE 1: BLUESTAR ISRAEL GLOBAL INDEX TEN-YEAR RELATIVE PERFORMANCE ENDING July JOSHUA KAPLAN, CFA Director of Research (646) jkaplan@bluestarindexes.com STEVEN SCHOENFELD Chief Investment Officer (646) sschoenfeld@bluestarindexes.com /31/2008 7/31/2010 7/31/2012 7/31/2014 7/31/2016 7/31/2018 BIGI TA-125 MSCI Israel Uncapped MSCI EM MSCI EAFE

2 July Equity Market Performance and Economic Review In July, Israeli global equities, as measured by BlueStar s BIGI index and tracked by the VanEck Vectors Israel ETF (NYSE: ISRA ), gained 3.64%, outperforming MSCI EAFE by more than one percentage point. More than half of BIGI constituents posted a positive performance in July, indicating a resumption of momentum throughout the Israeli market, following general weakness in June. Top performers in July were small-cap tech stocks including big data management company, Attunity, and unified communications technology company, AudioCodes. The Israeli Shekel continued to weaken in July and has now depreciated 6% against the US Dollar for 2018 YTD. In 2017, when most developed market currencies were weakening against the Dollar, the Israeli Shekel continued to appreciate. This year, however, it seems that divergence in monetary policy between the US and Israel is finally having an impact on the Shekel. Two additional risk factors emerged in July that investors should take note of. First, rocket fire from Gaza into Israel has accelerated, increasing the likelihood of a larger confrontation. In addition, Iran and its proxies continue to test Israel s resolve in the North. In the past, Israeli equities typically have an initial negative reaction to military escalation. Research also shows that this period is followed shortly by a rebound and reassertion of fundamental factors. Second, it seems increasingly likely that there will be early elections in Israel, ahead of the November 2019 official schedule. Political uncertainty tends to increase volatility in Israeli equities. It is important to note that, mitigating this risk, all major parties who might lead a winning coalition government are strong supporters of Israel s (successful) economic policies of ongoing reform, fiscal responsibility, as well as prudent investments in infrastructure and technological innovation. FIGURE 2: ISRAEL AND GLOBAL EQUITY BENCHMARK COMPARISON Benchmark July Return (%) YTD (%) BIGI BIGITech MSCI Israel Uncapped TA (2.44) S&P MSCI EM 2.20 (4.61) MSCI EAFE 2.46 (0.36) Israel Domestic Exposure Index 1.05 (11.80) Israel Global Exposure Index Sources: BlueStar Indexes, Bloomberg LP YTD as of July 31, 2018 FIGURE 3: GLOBAL TECHNOLOGY STOCK INDEX COMPARISON Benchmark July Return (%) YTD (%) BIGITech Dow Jones US Tech S&P Global 1200 Info Tech MSCI EM Tech (0.11) (3.21) Sources: BlueStar Indexes, Bloomberg LP YTD as of July 31, 2018 FIGURE 4: TOP AND BOTTOM BIGI PERFORMERS: July 2018 Positive Contributors (%) Negative Contributors (%) ATTUNITY LTD VARONIS SYSTEMS INC (19.77) AUDIOCODES LTD ELECTRA CONSUMER PRODUCTS 19 (14.66) OPKO HEALTH INC MEDIWOUND LTD (11.59) CLAL INSURANCE ENTERPR HLDGS SUNY CELLULAR COMMUNICATION (11.40) EL AL ISRAEL AIRLINES VASCULAR BIOGENICS LTD (11.36) CHECK POINT SOFTWARE TECH UROGEN PHARMA LTD (9.16) FOAMIX PHARMACEUTICALS LTD REDHILL BIOPHARMA LTD-SP ADR (8.91) PLUS500 LTD GILAT SATELLITE NETWORKS LTD (8.39) PROTALIX BIOTHERAPEUTICS INC SKY AND SPACE GLOBAL LTD (8.32) MIGDAL INSURANCE & FINANCIAL SAFECHARGE INTERNATIONAL GRO (8.21) *Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms FIGURE 5: ISRAELI EQUITY SECTOR PERFORMANCE July 2018 GICS Sector Period Return (%) Financials 6.19 Energy 4.73 Health Care 4.33 Materials 3.91 Information Technology 3.66 Utilities 1.83 Industrials 1.10 Consumer Staples (0.22) Real Estate (0.33) Consumer Discretionary (1.89) Telecommunication Services (4.05) Page 2 of 6

3 Are Domestically-Oriented Israeli Stocks Poised for a Positive Reversal? Globally-oriented Israeli stocks, as measured by the Solactive BlueStar Israel Global Exposure Index, IGEI underperformed domestically-oriented Israeli stocks, as measured by the Solactive BlueStar Domestic Exposure Index, IDEI in This year, however, IDEI is down more than 13% as the Israeli real estate market hit a soft patch, and the Israeli Shekel has weakened resulting in lower asset prices and a weaker Israeli consumer. At the same time, the IGEI has gained more than 9% led by a rebound in Israel s largest company, Teva Pharmaceuticals, general strength in Israel s largest sector, technology, and a tailwind to Israeli exporters in the form of a weaker Shekel. Possible catalysts for a reversal in the IDEI include an overly-depressed sentiment on the Israeli consumer which have led to potential dislocations in Israeli retail stocks; rising dividend and buy-backs by Israeli banks; and a possible bottoming of the mini-correction in Israel s real-estate market. BlueStar also monitors technical indicators related to the relative performance of our IGEI and IDEI indexes, as they provide valuable insight into the trajectory of the overall Israeli equity market, as measured by BIGI. The top chart (below) demonstrates the divergence between globally- and domestically- oriented Israeli stocks. The bottom chart (below) shows that the trend in IDEI underperformance is still underway, as the short and long-term moving averages of relative performance are still sloped downward and have not been broken. Also, support for IDEI relative to IGEI has not yet been reached but is not too far below. For these reasons - and because the Israeli Shekel continues to drift lower - we would expect IGEI to continue to outperform in the near-term before a significant upside reversal of IDEI occurs. 120 IGEI & IDEI Trailing Twelve Month Comparative Total Returns /31/ /31/2017 1/31/2018 4/30/2018 7/31/2018 Israel Domestic Exposure Israel Global Exposure IGEI & IGEI Relative Performance Since Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Israel Domestic Relative to Israel Global 50-Day SMA 200-Day SMA Page 3 of 6

4 Technical Analysis of Israeli Equities Our technical analysis outlook for the broad Israeli equity market using the broad BIGI benchmark remains neutral but is on the cusp of turning bullish. Despite a strong showing in Spring and early Summer, BIGI has yet to break through the lower parallel red trend lines, which have been confirmed as resistance four times since early The short-term chart, below confirms this resistance level but better illustrates how close the index is to a significant inflection point. With July s strength, we expect a breakout in BIGI which could propel the index higher into the next resistance level at 2015 s highs (approximately 10% upside) or beyond, perhaps up to the second set of parallel red trend lines, above. Page 4 of 6

5 Technical Analysis of Israeli Tech Stocks Israeli Tech Stocks, as defined by BlueStar s BIGITech Index, are in a clear bullish trend., further confirmed by price action in July. In May, the BIGITech chart resolved itself in a breakout to the upside, and June s and July s consolidation to test newly-established support has confirmed the breakout. In the first two weeks of July, with the 50- and 200- day moving averages also confirming themselves as support, the index broke through long-term resistance lines originating back to before the 2008/2009 financial crisis. Our measured target, illustrated in the chart above, indicates 17% upside for the BIGITech index from current levels with no major resistance in sight, though we would use caution regarding overbought indicators. Page 5 of 6

6 Disclosures This report was prepared by analysts of BlueStar Global Investors LLC (doing business as BlueStar Indexes ). Any opinions expressed herein are solely those of the author(s). BlueStar Global Investors LLC and BlueStar Indexes make no warranty, express or implied, as to the results to be obtained by any person or entity from the use of the indexes, trading based on the indexes, or any data included herein about investment in ETFs or funds tracking BlueStar s BIGI or BIGITech benchmarks, or for any other use, or about any other product mentioned in this document. The information contained herein is not intended as a recommendation to buy or sell any security and past performance is no guarantee of future results. The BlueStar Israel Technology ETF ( ITEQ ) is distributed by ETFMG Financial LLC, located at 30 Maple St, Summit, NJ, which is affiliated with ETF Managers Group LLC. Joshua Kaplan is a registered representative of ETFMG Financial LLC. BlueStar Indexes, is a provider of financial indexes used as the basis for the ITEQ Israel Tech ETF and the VanEck Vectors Israel ETF (ISRA ), as well as twelve ETNs and mutual funds domiciled, regulated and distributed in Israel. BlueStar is compensated by fund sponsors based on the level of assets under management in those investment vehicles. The authors are long, have trading authority over accounts which are long, or may enter into long positions in the following securities which are constituents of BlueStar s Indexes or track BlGI or BIGITech : Amdocs (DOX), Attunity (ATTU), CyberArk (CYBR). DSP Group (DSPG), Elbit Systems (ESLT), Teva Pharmaceuticals (TEVA), Israel Chemicals (ICL), BlueStar Israel Technology ETF (ITEQ ), and VanEck Vectors Israel ETF (ISRA ) BlueStar Global Investors, LLC Page 6 of 6