BlueStar Israel Equity Review & Outlook March/April 2016

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1 BlueStar Israel Equity Review & Outlook March/April 2016 The BlueStar Indexes Monthly Update covers Israeli equities traded worldwide. The BlueStar Israel Global Index (BIGI or BLS:IND on Bloomberg) is used as the benchmark for our review as it represents the complete opportunity set of Israeli equities. BIGI is tracked by the NYSE-listed ISRA Israel ETF, by two TASE-listed ETNs, and by an Israeli-registered mutual fund. Israel has one of the world s most resilient economies, its technology sector is a global innovation leader, and its companies have a global footprint. The Update provides insight into macro forces, the geopolitical environment in which Israel s economy operates, and the individual company investment opportunities that have contributed to Israeli Global Equities impressive long-term performance. Relief rally... or something more? April 7, 2016 Israeli Global Equities, as measured by BIGI, rallied strongly in March, rising by 4.99%, significantly outperforming other Israeli equity benchmarks. Despite this strength, BIGI underperformed major equity indexes in the U.S., Europe and in emerging markets. The performance of Israeli Global Technology Equities, as measured by TA-BIGITech, was even more impressive as the index rose 7.65% in March. This was more than the Nasdaq 100 and more than twice the return of the TA-BlueTech index. Eight of the 10 industry sectors tracked by BIGI notched gains during the month. The only two sectors that declined Energy and Health Care were hit by sector and company specific factors. The energy sector declined sharply due to lower global energy prices and, more importantly, due to a court decision that once again injected uncertainty into the terms of the agreement for development of Israel s largest offshore natural gas field. While we remain cautiously optimistic that a (Commentary continued on following page.) BlueStar Israel Global Index Relative Performance Since 2010 TASE-BlueStar Israel Global Technology Index Relative Performance Since TA-100 S&P 500 BIGI EIS BIGITech NQ-100 Global Tech (IXN) Global Equity Benchmark Comparison: March2016 Benchmark Period Return BIGI 4.99% MSCI Israel -0.26% TA % S&P % MSCI EAFE 6.02% MSCI EM 13.03% Global Technology Stock Index Comparison: March 2016 Benchmark Period Return BIGITech 7.65% Nasdaq % S&P Global Tech 9.25% TA- BlueTech 3.51% EM Internet & E-commerce 11.25% 1

2 BlueStar Israel Equity Review & Outlook March/April 2016 solution will ultimately be forthcoming, the politicization of what should be a straightforward commercial deal is definitely dismaying. The decline in health care was primarily driven by weakness in index heavyweight Teva Pharmaceuticals, which suffered several regulatory setbacks during the month. Macroeconomic data released in March was decidedly mixed. Consumer confidence and the purchasing managers index both declined during the month, indicating slightly weaker economic growth. The most recent export data showed a 3.6% year-onyear decline, also a negative signal for growth. This has yet to show up in the Bank of Israel s (BoI) 2016 GDP growth forecast which remained unchanged at 2.8%. (The forecast for 2017 was reduced slightly from 3.1% to 3.0%.) One positive, at least from the BoI s perspective, was an increase in market inflation expectations over the next 12 months from 0.4% to 0.6%. Despite this, inflation is not expected to enter the Bank s 1.5% - 3.0% target range until the middle of In keeping interest rates at 0.10% for April, the BoI said the risks to achieving the inflation target and to growth remain high. BlueStar Bottom Line: We expect Israeli Global Equities to give back some of March s gains and to consolidate at slightly lower levels. A subsequent move higher will depend on the global economic backdrop as we move into Q earnings season. We expect another mixed bag of results in Q1 but will look for signs that corporate earnings will begin to recover in the second half of the year. Risks to our view include the usual suspects: earlier than expected U.S. interest rate increases, continued weakness in global growth and European political and economic turmoil ahead of June s referendum in the U.K on continued membership in the E.U. Top Israeli Equity Gainers and Losers: March 2016 Top-performing Israeli Stocks Worst-performing Israeli Stocks Plus500 Ltd 54.93% Chiasma % Pluristem Therapeutics 42.48% Alcobra % Africa Israel Properties 33.79% Attunity % Mellanox Technologies 33.65% Delek US % Osem Investments 28.76% Perion Network % Jerusalem Economy 25.48% Alon USA Energy % Magic Software 19.88% Medgenics % Mazor Robotics 19.81% Supercom % Bayside Land Corp 19.16% Radware % Ormat Technologies 18.21% Foamix Pharma % Source: BlueStar Global Investors LLC; Currency-Adjusted returns in dollar terms Israeli Equity Sector Performance: March 2016 GICS Sector Return Utilities 18.21% Consumer Staples 8.57% Telecom. Services 5.32% Financials 4.56% Info. Technology 3.29% Industrials 2.45% Materials 1.95% Consumer Disc. 1.84% Energy % Health Care % 2

3 Market Trends & Technical Analysis: BIGI Strong Support Area Last month we said it is likely that that the index will test the area between the neckline of the head and shoulders pattern and the underside of the long-term upward trend lines that were broken in January. For the key underlying trend to turn from bearish to bullish we would need to see at least one set of convincing higher lows and higher highs combined with sustained improvement in the moving averages shown on the following page. At the end of March the index had nearly reached the neckline resistance before losing some momentum. It is now becoming highly likely that the index will pull back from current levels either to test the newly established bright green upward trend lines and form an investable double bottom, or break February s lows as part of a more protracted bull market correction. For now there is still room for the index to move higher into an important resistance area between the neckline and the underside of the upward sloping red trend lines in the very near term. Strong Support Area 3

4 Market Trends & Technical Analysis: BIGI Last month: If the index can break through the 50-day moving average, the next move would be to test the 200-day moving average and the neckline bottom. This chart remains bearish as both the 50- and 200- day averages are sloped downward but we are still likely to see a period of consolidation/relief as the 200-day average catches up to the 50-day average before another move lower. This month: The break above the 50-day moving average was convincing. If the Israeli market actually bottomed in Q1, it is highly likely that BIGI will at least test the 50-day average before resuming its upward momentum. However, until the 50-day is tested and holds, it still appears that we are in a relief rally off a very oversold level before another leg lower. Additionally the strong upward move since mid February does not change the fact that the 50-day average is below the 200-day average and the 200-day average is downward sloping. This chart is becoming bullish as the index broke through the 100-day moving average in late March suggesting near-term upside. However, as with the above chart, the index is still likely to pullback to test the 30-day average to confirm that the downtrend has been reversed. 4

5 Market Trends & Technical Analysis: BIGITech Strong Support Area TA-BIGITech moved sharply higher in March, confirming our view that the index ended February in an oversold condition. The index is quite close to testing the underside of the upward sloping red trend lines which are likely to serve as an area of strong resistance. Although it is possible that the index has some more upside to the area from here, the risks are skewed to the downside. But, the support area represented by the convergence of all green support/trend lines will not be easily broken. 5

6 Market Trends & Technical Analysis: Israeli Shekel vs U.S. Dollar The shekel strengthened against the U.S. dollar in March mostly due to market expectations for the Federal Reserve s next rate hike to come later than originally anticipated. Surprisingly, the shekel also strengthen as news broke that Israel s highest court would not allow the Prime Minister s proposal regarding the natural gas industry. The shekel has been holding above the red support lines for nearly six years so it was not surprising that the next major move in the dollarshekel rate was higher. We believe there is more upside for the shekel, though we do expect it to be limited to approximately $

7 Israel: the Go-To Destination for Global Technology Companies In this monthly feature we highlight the attractiveness of the Israeli technology sector by noting significant recent capital markets and M&A activity which demonstrates that Israel is a key destination for global companies seeking to acquire cutting-edge technologies and that the strength of the sector is increasingly encouraging Israeli companies to make acquisitions abroad. Israeli cancer screening and follow-up company Todos Medical filed a prospectus for a Nasdaq IPO. The Rehovot-based company has developed a platform for cancer screening through a blood test. Cisco Systems Inc. (Nasdaq: CSCO) has acquired Israeli company Leaba Semi Semiconductor for a reported $350-$400 million. The closely held Caesarea-based Leaba is a fabless semiconductor company providing innovative solutions for significant infrastructure challenges. This is Cisco s 12 th acquisition in Israel. German mobile ad technology platform RNTS Media will acquire Israeli mobile Real Time Bidding (RTB)-based ad exchange Inneractive Ltd. for $46 million cash and a further $26 million in potential milestone payments. Inneractive is a mobile RTB-based ad exchange focused on powering display, native and video ads. Israeli content recommendation company Outbrain has acquired U.S. content analytics company Revee. Revee's system allows publishers to track the revenue value of content in real-time. Using Revee s technology, Outbrain has launched Outbrain Automatic Yield - a content recommendation solution that enables publishers to monetize audiences with a real-time understanding of each piece of content. Intel (Nasdaq: INTC) is acquiring Israeli imaging company Replay for $175 mil. Replay develops multi-dimensional video imaging technology for television sports coverage. Israeli defense company Rafael Advanced Defense Systems Ltd. signed a cooperation agreement worth $10 billion with India s Reliance Defense. As part of the agreement, Rafael and Reliance will collaborate in developing, manufacturing and delivering air defense systems, air-to-air missiles, and large surveillance balloons (aerostats) for the Indian defense market. Chinese chipmaker 3Peak expects a sharp increase in integrated circuit shipments this year due as it expands its manufacturing output to a plant in Japan through an extension of its collaboration with Israel's TowerJazz. (TASE: TSEM; Nasdaq: TSEM) 3Peak's products are currently solely produced at TowerJazz's 200mm fab in Israel. 7