Bethel Finance: Barclays: Israel set for slowdown but no recession

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Bethel Finance news:
Barclays Capital forecast for the Israeli economy in 2012 is "cloudy, but fundamentally sound." It expects the Israeli economy to slow significantly, but does not anticipate recession. It predicts that the shekel will be stable, the interest rate will fall, and inflation will be tame.

Analysts Joseph Wolf, David Kaplan, and Tavy Rosner say, "The largest macro risks to Israel in 2012 are sustained global economic weakness along with potential for elevated concerns regarding geopolitical risk specifically related to the “Arab Spring” and Iran. These concerns are usually less important than the economy for equities."

The analysts point to the winds of change in Israel affecting regulations and social reform. "We have always considered Israel a well regulated market. For 2012 we see higher costs for companies as the government enacts the first application of social reforms (the output after the “tent cities” of the summer of 2011). From capital adequacy at the banks, to royalties for natural resources, to competition and fee reduction for telco services, the reach of the reforms is wide. The Trajtenberg findings, the official report on social reform, will impact company holdings, M&A, tax rates and budgets. Technology, based on mobile human capital and exports, is the relative winner in this category."

Finally, the analysts turn to Israel's pyramids. "Several wealthy families own or control a significant percent of the economy. At least 11 of the top 25 stocks in the country have some connection to a large holding company or family; cross holdings provide further complication. Israel Corporation (TASE: ILCO) owns 52% of Israel Chemicals, Azrieli Group Ltd. (TASE: AZRG) owns 5% of Bank Leumi (TASE: LUMI), which owns 5% of Partner Communications Ltd. (Nasdaq: PTNR; TASE: PTNR), and Bank Hapoalim owns 5% of Strauss Group Ltd. (TASE:STRS). Change to this structure is almost certain, the first of which is likely to be a more strict separation between financial and non-financial assets going forward. Our bias is to own the good operating companies, not the holding entities. We map some of the tangled webs of ownership in this report."

Barclays is positive on technology and chemicals, but neutral on energy, and negative on banks and telcos. Its stock picks are Mellanox Technologies Ltd. (Nasdaq:MLNX; TASE:MLNX) and Israel Chemicals Ltd. (TASE: ICL). Its energy stock pick is Ratio Oil Exploration (1992) LP (TASE:RATI.L), and it picks Bank Hapoalim (TASE: POLI) and Bezeq Israeli Telecommunication Co. Ltd. (TASE: BEZQ) as relative outperformers in their sectors, giving them "Overweight" recommendations.