BlueStar Israel Equity Update€¦ · Index in Q1 2013 2-5. About the BlueStar Israel Global Index (including Risk/ Return Data) 6-10. Technical Analysis 11. Israeli Sector Highlights

These are not recommendations to buy or sell any security

© 2013 BlueStar Global Investors, LLC

BlueStar Israel Equity Update Third Quarter 2013

What’s Inside

1. The BlueStar Israel Global Index in Q1 2013 2-5. About the BlueStar Israel Global Index (including Risk/Return Data) 6-10. Technical Analysis 11. Israeli Sector Highlights 12. Capital Markets 13. Israeli Economic Review 14. Geopolitical Environment

Ø  Global developed market equities pulled back slightly in Q2 2013 while U.S. stocks, as measured by the S&P 500 index, bucked the trend and posted a rise of 2.91%. Ø  The BlueStar Israel Global Index was down by 95 bps in Q2 2013 while the MSCI Israel and TA-100 indexes were down 4.16% and 2.76%, respectively. Ø  Israeli consumer stocks, which are correlated with both domestic consumption as well as consumer spending in Israel’s export markets, lead Israeli Global Equities in Q2, while the financial and energy stocks, which lead the Israeli Global Equity market’s rebound from the 2012 lows, consolidated. Ø  The Israeli government decided on a 2013 and 2014 budget that will result in tax increases and spending cuts and the Shekel’s sharp appreciation versus the dollar and euro eased a bit. Ø  Mellanox Technologies announced it will delist its shares from the Tel Aviv Stock Exchange and the TASE’s bid to be included in MSCI’s European regional indexes was declined. Both events sparked concern about the future of the local exchange. Also, Israeli corporate pyramids come under attack by The Committee on Increasing Competitiveness in the Economy and the Business Concentration Law.

Ø The Energy sector is asserting itself as a major player in the Israeli economy, natural gas reserve estimates and oil estimates are rising, and the government has decided upon an export strategy, clearing up uncertainty and removing some of the risk factors associated with investing in that sector.

Ø The newly-elected Egyptian government was overthrown by the army and the civil war in Syria has spilled over into Lebanon and into the Golan on several occasions. The European Union passed a funding ban on organizations operating in the “occupied territories.”

Q2 2013 in Review & Second Half 2013 Outlook

BIGI Performance (BlueStar Israel Global Index, Jan 2010- June 2013)

1

70

80

90

100

110

120

130

140

150

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

S&P 500 Index Level

BIGI Index Level

About the BlueStar Israel Global Index The BlueStar Israel Global Index (’BIGI’) provides a benchmark for investors to track the broadest and deepest universe of Israeli public companies. The index is constructed using BlueStar Indexes’ unique methodology and proprietary database of Israeli and Israel-linked companies. BIGI includes the largest and most liquid companies as well as mid and small cap companies that display sufficient liquidity for global investors. The index methodology allows for the inclusion of Israeli companies listed on the Tel Aviv Stock Exchange as well as other exchanges such as the London Stock Exchange, New York Stock Exchange, and NASDAQ. The BlueStar Israel Global Index has been created to provide investors with an investable product allowing them to quickly take advantage of both event-driven news and long-term economic trends as the economy and companies of Israel continue to evolve.

Compara?ve Sector Weights

Long-‐ Term Returns Five Year Correla?ons

Compara?ve Risk

*Annualized Incep?on Date: Dec. 1992 Source: BlueStar Global Investors LLC June 30 2013

*Annualized Incep?on Date: Dec. 1992 Source: BlueStar Global Investors LLC June 30 2013

Source: BlueStar Global Investors LLC June 30 2013

Source: BlueStar Global Investors LLC June 30 2013


© 2013 BlueStar Global Investors, LLC 2

Sector BIGI MSCI - EIS

FTSE Israel TA-25 TA-100

Info. Technology 28.6% 10.5% 6.7% 11.9% 12.0% Health Care 23.7% 23.4% 48.3% 20.6% 23.5% Financials 19.5% 32.5% 21.8% 30.2% 30.9%

Energy 8.6% 4.4% 3.8% 12.6% 9.7% Materials 7.3% 13.1% 9.2% 11.2% 9.9%

Industrials 3.4% 4.8% 2.7% 2.4% 4.2% Telecom Services 3.2% 6.9% 4.9% 8.6% 6.1% Consumer Disc. 2.9% 0.6% 0.4% 0.0% 0.7%

Consumer Staples 2.3% 3.8% 2.2% 2.5% 3.1% Utilities 0.5% 0.0% 0.0% 0.0% 0.0%

YTD 6/28/13 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception

ACWI 9.18% 6.98% 15.85% 20.94% 16.55% 17.02% 15.63%

EAFE 13.14% 9.51% 18.30% 22.98% 18.20% 18.03% 16.91%

MSCI EM 9.69% 11.45% 20.86% 27.78% 24.02% 25.00% 23.88%

S&P 500 7.69% 6.74% 13.57% 18.42% 14.58% 16.15% 14.99% MSCI Israel 8.05% 10.87% 19.58% 21.46% 18.93% 24.50% 24.07%

TA-100 8.20% 10.02% 19.15% 24.86% 21.92% 24.72% 24.59%

TA-25 8.72% 10.67% 19.71% 24.73% 22.09% 24.97% 24.61%

BlueStar 5.57% 6.90% 19.05% 23.76% 20.35% - -

YTD 6/28/13 1yr. 3yrs. 5yrs. 10yrs. 15yrs. Inception

ACWI 6.38% 17.21% 12.96% 2.86% 8.14% 4.48% 7.60%

EAFE 4.47% 19.14% 10.55% -0.16% 8.16% 4.06% 6.52%

MSCI EM -9.40% 3.23% 3.72% -0.11% 14.02% 10.05% 8.04%

S&P 500 13.82% 20.60% 18.45% 7.01% 7.30% 4.24% 8.66% MSCI Israel 2.65% 5.06% -5.84% -5.00% 5.87% 5.56% 5.27%

TA-100 4.68% 18.57% 4.82% -0.02% 10.84% 8.46% 7.16%

TA-25 2.92% 20.81% 6.05% 0.19% 12.28% 8.93% 7.48%

BlueStar 6.59% 18.68% 6.45% 2.63% 12.56% - -

ACWI MSCI EM EAFE S&P 500 MSCI Israel TA-100 TA-25

ACWI 1.00

MSCI EM 0.94 1.00

EAFE 0.98 0.92 1.00

S&P 500 0.97 0.86 0.92 1.00

MSCI Israel 0.71 0.76 0.68 0.66 1.00

TA-100 0.84 0.86 0.80 0.79 0.85 1.00

TA-25 0.85 0.87 0.82 0.80 0.86 0.99 1.00

BlueStar 0.86 0.87 0.83 0.81 0.88 0.98 0.97

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BlueStar Israel Global Index Cons5tuents and Weights



Company Name Ticker Exchange Index Weight as of June 18 2013

1 TEVA PHARMACEUTICAL IND LTD TEVA TASE 12.50%2 PERRIGO CO PRGO NASDAQ 8.51%3 CHECK POINT SOFTWARE TECH CHKP NASDAQ 6.46%4 AMDOCS LTD DOX NASDAQ 4.96%5 ISRAEL CHEMICALS LTD ICL TASE 4.10%6 BANK HAPOALIM BM POLI TASE 4.04%7 BANK LEUMI LE-ISRAEL LUMI TASE 3.90%8 STRATASYS LTD SSYS NASDAQ 2.27%9 VERIFONE SYSTEMS INC PAY NASDAQ 2.24%

10 BEZEQ THE ISRAELI TELECOM CO BEZQ TASE 2.15%11 ISRAEL CORP LIMITED/THE ILCO TASE 2.07%12 NICE SYSTEMS LTD NICE TASE 2.00%13 MELLANOX TECHNOLOGIES LTD MLNX NASDAQ 1.78%14 VERINT SYSTEMS INC VRNT NASDAQ 1.60%15 ISRAMCO NEGEV 2 LP ISRAL TASE 1.36%16 PLAYTECH PLC PTEC LN 1.25%17 ISRAEL DISCOUNT BANK-A DSCT TASE 1.25%18 DELEK US HOLDINGS INC DK NYSE 1.24%19 MIZRAHI TEFAHOT BANK LTD MZTF TASE 1.23%20 SODASTREAM INTERNATIONAL LTD SODA NASDAQ 1.11%21 DELEK GROUP LTD DLEKG TASE 1.04%22 GAZIT GLOBE LTD GZT TASE 1.00%23 ELBIT SYSTEMS LTD ESLT TASE 0.96%24 AVNER OIL EXPLORATION - LP AVNRL TASE 0.91%25 AZRIELI GROUP AZRG TASE 0.88%26 TARO PHARMACEUTICAL INDUS TARO NYSE 0.87%27 FIRST INTL BANK ISRAEL FTIN TASE 0.81%28 EZCHIP SEMICONDUCTOR LTD EZCH TASE 0.79%29 PAZ OIL CO LTD PZOL TASE 0.74%30 IMPERVA INC IMPV NYSE 0.73%31 OSEM INVESTMENTS LTD OSEM TASE 0.70%32 RADWARE LTD RDWR NASDAQ 0.64%33 HAREL INSURANCE INVESTMENTS HARL TASE 0.63%34 DELEK DRILLIN - LP DEDRL TASE 0.62%35 STRAUSS GROUP LTD STRS TASE 0.61%36 RATIO OIL EXPLORATION RATIL TASE 0.61%37 MIGDAL INSURANCE & FINANCIAL MGDL TASE 0.60%38 FRUTAROM FRUT TASE 0.57%39 CELLCOM ISRAEL LTD CEL TASE 0.55%40 LIVEPERSON INC LPSN NASDAQ 0.54%41 PARTNER COMMUNICATIONS CO PTNR TASE 0.54%42 SHIKUN & BINUI LTD SKBN TASE 0.52%43 CLAL INSURANCE ENTERPR HLDGS CLIS TASE 0.52%44 ALONY HETZ PROPERTIES & INV ALHE TASE 0.51%45 ORBOTECH LTD ORBK NASDAQ 0.51%46 ORMAT TECHNOLOGIES INC ORA NYSE 0.49%47 ALON USA ENERGY INC ALJ NYSE 0.49%

Company Name Ticker Exchange Index Weight as of June 18 2013

48 PROTALIX BIOTHERAPEUTICS INC PLX AMEX 0.47%49 CEVA INC CEVA NASDAQ 0.45%50 OIL REFINERIES LTD ORL TASE 0.45%51 ALLOT COMMUNICATIONS LTD ALLT NASDAQ 0.44%52 DELEK AUTOMOTIVE SYSTEMS LTD DLEA TASE 0.43%53 888 HOLDINGS PLC 888 LN 0.43%54 DELEK ENERGY SYSTEMS LTD DLEN TASE 0.43%55 ORMAT INDUSTRIES LTD ORMT TASE 0.42%56 GIVEN IMAGING LTD GIVN NASDAQ 0.41%57 RAMI LEVI CHAIN STORES HASHI RMLI TASE 0.41%58 CLAL INDUSTRIES LTD CII TASE 0.41%59 PROLOR BIOTECH INC PBTH NASDAQ 0.40%60 SYNERON MEDICAL LTD ELOS NASDAQ 0.40%61 NITSBA HOLDINGS (1995) LTD NTBA TASE 0.40%62 SHUFERSAL LTD SAE TASE 0.37%63 MELISRON MLSR TASE 0.37%64 MENORAH MIVTACHIM HOLDINGS L MMHD TASE 0.37%65 ITURAN LOCATION AND CONTROL ITRN TASE 0.35%66 CAESARSTONE SDOT-YAM LTD CSTE NASDAQ 0.35%67 AMOT INVESTMENTS LTD AMOT TASE 0.35%68 JOEL-JERUSALEM OIL EXPLORATI JOEL TASE 0.34%69 COMPUGEN LTD CGEN NASDAQ 0.34%70 KAMADA LTD KMDA TASE 0.34%71 PHOTOMEDEX INC PHMD NASDAQ 0.33%72 NOVA MEASURING INSTRUMENTS NVMI TASE 0.33%73 AFRICA-ISRAEL INV LTD AFIL TASE 0.33%74 CLICKSOFTWARE TECHNOLOGIES CKSW NASDAQ 0.33%75 PHOENIX HOLDINGS LTD/THE PHOE1 TASE 0.32%76 CINEMA CITY INTERNATIONAL NV CCI Warsaw 0.32%77 GILAT SATELLITE NETWORKS LTD GILT TASE 0.31%78 EVOGENE LTD EVGN TASE 0.31%79 BABYLON LTD BBYL TASE 0.30%80 DSP GROUP INC DSPG NASDAQ 0.30%81 SILICOM LTD SILC NASDAQ 0.30%82 PLURISTEM THERAPEUTICS INC PSTI NASDAQ 0.30%83 AFRICA ISRAEL PROPERTIES LTD AFPR TASE 0.28%84 BAYSIDE LAND CORP (1) BYSD TASE 0.28%85 KOOR INDUSTRIES LTD KOR TASE 0.27%86 MAZOR ROBOTICS LTD MZOR TASE 0.26%87 AUDIOCODES LTD AUDC NASDAQ 0.26%88 JERUSALEM ECONOMY LTD ECJM TASE 0.26%89 FIBI HOLDINGS FIBI TASE 0.26%90 BRAINSWAY LTD BRIN TASE 0.25%91 CERAGON NETWORKS LTD CRNT NASDAQ 0.25%92 DISCOUNT INVESTMENT CORP-REG DISI TASE 0.24%93 GIVOT OLAM OIL EXPLORAT- LP GIVOL TASE 0.11%

4

June 2013 BlueStar Israel Global Index Rebalance Review



BIGI Addi5ons Stratasys (SSYS:NASDAQ) 2.27% of BIGI Global Provider of three-‐dimensional prin?ng solu?ons including 3D printers, prin?ng resin and services. Operates in the Informa?on Technology sector. Compugen (CGEN:TASE,NASDAQ) 0.34% of BIGI Develops products used to analyze DNA generated by high throughput sequencing. Develops bioinforma?cs hardware and so]ware. Operates in the Health Care sector. Photomedex (PHMD:NASDAQ) 0.33% of BIGI Global skin health solu?ons company providing disease management and aesthe?c solu?ons to dermatologists, professional aesthe?cians and consumers. Operates in the Health Care sector. Silicom (SILC:TASE, NASDAQ) 0.30% of BIGI Provider of connec?vity and networking solu?ons to the networking industry. Operates in the Informa?on technology sector. Mazor Robo5cs (MZOR:TASE,NASDAQ) 0.26% of BIGI Develops and delivers robo?c guidance systems for spinal surgery. Operates in the Health Care sector. Audiocodes (AUDC:TASE,NASDAQ) 0.26% of BIGI Designs, develops and markets voice and data products and services over packet networks including voice over packet and internet protocol, as well an internet protocol phones and media gateways. Operates in the Informa?on Technology sector. FIBI Holdings (FIBI:TASE) 0.26% of BIGI The parent company of First Interna?onal Bank of Israel and other banking subsidiaries in Israel. Operates in the Financials sector. Brainsway (BRIN:TASE) 0.25% of BIGI Patented technology for a non-‐invasive solu?ons for Major Depressive Disorder which has been approved by the FDA. Operates in the Health Care sector. Discount Investment Corp (DISI:TASE) 0.24% of BIGI Major holding company in Israel opera?ng in the communica?ons, technology, retail, real estate and industrial sectors. Holdings include Cellcom, Koor Industries, Shufersal, and Given Imaging. Operates in the Financials sector.

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BlueStar Israel Global Index Q2 2013 Performance A_ribu5on and Differen5ators

BIGI Internal Characteris5cs A_ribu5on (currency and exchange lis5ng)

Currency A_ribu5on Exchange-‐Related A_ribu5on



BlueStar Israel Global Index Cons5tuent A_ribu5on vs MSCI Israel (capped)

Total Index Weight Listed on Local

Exchange(s) as of June. 28 2013

Local Currency Performance vs USD (Q2 2013)

A_ribu5on of Currency

Performance to BIGI Performance

Israel – New Israeli Shekel (TASE)

70.18% 0.82% 0.78%

US -‐ US Dollar (NYSE, NASDAQ,

AMEX) 27.90% 0.00% 0.00%

UK – GB Pound (London) 1.59% 0.39% 0.01%

Poland – Polish Zolty

(Warsaw) 0.30% -‐1.27% -‐0.00%

Total Direct Effect of Currency

Fluctua?on on BIGI Price Level

-‐ -‐ 1.80%

Total Index Weight as of June 28 2013

A_ribu5on of Category to BIGI Performance (Q2

2013)

Dual-‐Listed Cons?tuents 32.00% -‐0.10%

Non-‐TASE Cons?tuents 29.58% -‐0.47%

Non-‐TASE Technology Cons?tuents

24.09% -‐0.31%

Company Name

BIGI Weight Rela?ve to MSCI Israel Capped

Index

Q2 2013 Posi?ve Rela?ve Weight Akribu?on

Israel Chemical Corp -‐4.51% 1.06%

SodaStream Interna?onal 1.13% 0.53%

Check Point So]ware (US) 6.77% 0.39%

Israel Corp -‐1.06% 0.22%

Bank Leumi Le-‐Israel BM -‐3.84% 0.22%

Teva Pharmaceu?cal Industries -‐11.42% 0.21%

Perrigo Co 8.87% 0.17%

MELLANOX TECH -‐1.56% 0.17%

Imperva Inc 0.87% 0.15%

Orbotech Ltd (US) 0.54% 0.13%

Company Name

BIGI Weight Rela?ve to MSCI Israel Capped

Index

Q2 2013 Nega?ve

Rela?ve Weight Akribu?on

VeriFone Systems Inc 2.44% -‐0.46%

Radware Ltd 0.61% -‐0.39%

Delek US Holdings 1.14% -‐0.31%

LivePerson Inc 0.58% -‐0.20%

Alon Usa Energy 0.44% -‐0.11%

Isramco Negev 2 LP 1.17% -‐0.09%

Osem Investment -‐0.78% -‐0.07%

Ezchip Semiconduct -‐0.62% -‐0.07%

Frutarom -‐0.52% -‐0.06%

Syneron Medical Ltd 0.42% -‐0.06%

BlueStar Israel Global Index Technical Analysis

6

The consolida?on of Israeli Global Equi/es, as measured by BIGI, which began in April of this year, con?nued through the end of the second quarter but was broken by a surge in Israeli Global Equi?es in early July. We consider this a major breakout – one which we’ve been an?cipa?ng for many months – and it confirms our bullish bias toward the market. A]er breaking important trend lines in November 2012 (during Israeli Global Equi/es’ rebound from the sharp drop at the beginning of Opera?on Pillar of Defense), the BlueStar Israel Global Index (BIGI) consolidated in December and resumed its upward movement in January and February 2013. The market selloff during Opera?on Pillar of Defense to the 200 index level for BIGI confirmed that this is a significant medium and long term level of support for the index. On the three-‐year chart on the following pages, we see that BIGI was consolida?ng, within a trading range roughly between 228 and 238. The range was occurring within the context of an upward trend. The upper band of the range was also the con?nua?on of a resistance line connec?ng the Q4 2011 and Q2 2012 peaks, represented by the solid black line on the three year chart. Addi?onally, over the course of this consolida?on, the 30 and 100 day moving averages had a chance to catch up to the index on the three year chart and the index ended June below both moving averages. The June low at roughly 228 coincided with both the lower band of the range described above and the upward trend line connec?ng the 2012 low and the low point in Israeli Global Equi?es during Opera?on Pillar of Defense. The 228 level proved to be a significant level of support for the index as Israeli Global Equi?es rebounded from that point and broke through the aforemen?oned 238 resistance level in early July. Addi?onally, although the index did probe below both the 30 and 100 day moving averages, the shorter term average did not cross the longer term moving average and both are now poin?ng upwards, indica?ng a con?nua?on of the bullish trend in the index. The longer-‐term outlook for Israeli equi?es con?nues to be firmly bullish as the index re-‐entered, and then broke through the channel connec?ng the 2008/2009 lows back in late 2012, as illustrated in the BIGI six-‐year chart on the following pages. So long as the index remains above this channel, the longer-‐term outlook for Israeli Global Equi?es remains decidedly bullish. In May, we noted in our Monthly Update that it appeared as if the 50 Day SMA had moved too far too fast ahead of the 200 day SMA on the six year chart and we wouldn’t be surprised to see further consolida?on or a short-‐term pull back in the index. The 200 Day SMA, in our view, caught up enough to the 50 Day SMA in June to jus?fy a further rise in the underlying BIGI index. Based on both the three and six year charts, 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 -‐-‐ likely a]er hiqng resistance between 255 and 260 and a consolida?on between 270 and 280. Risk parameters for those with a short-‐term ?me horizon should view a daily close below the 228 level, which would indicate a break below both the upward trend line and support level of the consolida?on range, as a sell signal/ ini?al 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. On the six-‐year chart, a break below the 220 level should act as a warning sign. A weekly close below the 2012 low of 195, however, would shi] the longer-‐term outlook drama?cally and any rallies should be sold. Given the decisive breakout of early in this quarter, we consider the probability of a major drop like this quite unlikely, especially as key global markets such as the US and Japan – as well as Developed Europe – appear to be resuming their bullish trends a]er the late-‐spring/early-‐summer ‘tapering scare.’ regarding US monetary policy

7

Source: BlueStar Global Investors LLC (Jan 1 2010-‐ July 18 2013)

Source: BlueStar Global Investors LLC (Jan 1 2010-‐ July 18 2013)


8 8

Source: BlueStar Global Investors LLC (January 1 2007-‐ July 18 2013)

Source: BlueStar Global Investors LLC (January 1 2007-‐ June 18 2013)


9

Technical Analysis: Top Ten Holdings (BIGI Weights as of June 2013 Rebalance)

TEVA (12.50% of BIGI)

Check Point Sogware (6.46%)

Israel Chemicals (4.10%) Amdocs (4.96%)

Perrigo Co. (8.51%)



50-‐Day Simple Moving Average 200-‐Day Simple Moving Average

We closely follow chart pakerns of the largest BIGI cons?tuents or BIGI cons?tuents that are components of key sectors in the index such as technology and health care. We have been observing bullish chart forma?ons and breakouts in many key BIGI cons?tuents towards the end of June and beginning of July, including Teva, Perrigo, Check Po int , Amdocs , Imperva, Orbotech, Taro Pharmaceu?cals, and Mellanox Technologies.

10 10

Technical Analysis: Top Ten Holdings ( Weights)

Bezeq (2.15%)

Stratasys (2.27%) VeriFone Systems (2.24%)

Bank Hapoalim (4.04%) Bank Leumi (3.90%)



Israeli Sector Spotlight

The Oil & Gas sector, like the financials, pulled back in Q2 2013 a]er being amongst the market leaders in the previous several quarters. In Q2, the proven natural gas reserves in the Leviathan field were raised from 18 to 19 trillion cubic feet, and the es?mated reserves in the Tamar site were raised to 10 trillion cubic feet. Also, in early Q3 it was learned that the Leviathan partners believe they may find 1.5 billion barrels of oil beneath the Mediterranean seabed. Needless to say, the Energy sector is asser?ng itself as a major force driving Israeli economic growth and stability. The discussion has now shi]ed from how much gas and oil there is in Israeli territorial waters to what is the best way to export and manage these natural resource discoveries. The Israeli government has decided to allow 40% of Israel’s natural gas reserves to be exported and a por?on of Israel’s gas is being set aside for immediate delivery to Jordan and the Pales?nian areas. It seems as though the southern coast of Cyprus will be host to a liquefied natural gas plant which will process Israeli, Cypriot and poten?ally Lebanese natural gas for export: Delek Group and Noble Energy signed a Cypriot memorandum of understanding on the issue and Woodside Energy, which was expected to purchase a 30% stake in Israeli gas fields, is now considering joining the Cypriot consor?um in avoidance of unfavorable tax and regulatory policy and poten?al nega?ve geopoli?cal side effects of working in Israel. The posi?ve impact on Israel’s economy of the natural gas reserves is already being felt – electricity and gasoline prices have been reduced and are expected to con?nue on this downward path in the months and years to come. Also, fuel-‐related imports have accounted for roughly -‐6% of GDP over each of the past 7 years. When Israel becomes energy independent, it will result in a 6% rise in annual GDP and a 6% shi] in the current account toward surplus. These macroeconomic side effects will have far reaching consequences, such as strengthening the local currency and reducing the Israeli government’s sovereign credit risk, which will result in increased consumer spending and lower discount rates throughout Israel’s capital markets.

Energy

Israeli Consumer stocks were the leading groups of stocks in Q2 2013, comple?ng their fourth consecu?ve quarter of gains. Consumer stocks were lead higher by SodaStream Interna?onal and food-‐related stocks including Shufersal, one of the largest super market chains in Israel, and food manufacturers like Strauss and Osem Investments. SodaStream reported improving fundamentals and was also propelled higher by takeover rumors, though the stock has pulled back sharply in early Q3. Although the consumer confidence index in Israel declined in May and June, consumer spending remains

11

healthy in Israel and in Israel’s largest export markets. Food exports from Israel to the U.S., for example, rose by over 50% over the past five years and is expected to rise by another 50% in the years to come. Addi?onally, the rising shekel and strong local economic growth are conducive to greater consumer spending in Israel. Lastly, though Israel is classified as a developed economy by organiza?ons such as FTSE and MSCI, it retains many of the demographic characteris?cs of an emerging market, leading to robust consumer discre?onary and services sector growth.

Consumer Services and Goods



Though the financials pulled back in Q2 2013, the sector remains well capitalized and posi?oned to do well as the overall economy expands. Israeli financial stocks lead Israeli Global Equi?es higher a]er making three year lows in late 2012. The banking sector in Israel remains well capitalized. We learned in early Q3 2013 that Bank Hapoalim will distribute a dividend for the first ?me in two years which is a posi?ve sign for the banking sector in Israel.

Financials

Sector As defined by

BlueStar Indexes

Q2 2013 Performance

Q1 2013 Performance

Q4 2012 Performance

Q3 2012 Performance

Consumer Discre?onary 0.62% 0.38% 0.04% 0.22% Consumer Staples 0.25% 0.20% 0.12% -‐0.03%

Technology 0.10% 0.95% 1.54% 1.40% U?li?es 0.02% -‐0.05% -‐0.30% -‐0.07%

Industrials -‐0.03% 0.55% 0.11% 0.26% Telecommunica?ons -‐0.07% 0.41% -‐0.40% 0.25%

Health Care -‐0.09% 2.08% -‐1.97% 0.31% Financials -‐0.13% 1.13% 4.45% 0.73% Energy -‐0.85% 1.23% 2.15% 0.76%

Basic Materials -‐1.47% 0.73% -‐0.16% 0.93%

Developments in the Corporate and Capital Markets Arenas

Israel’s Global Footprint A key source for Israel’s economic resiliency and growth is its ability to tap interna?onal markets and forge economic and security agreements with foreign governments and agencies. In the second quarter of 2013, several such developments occurred, including: §  Forma?on of new Knesset commikees focused on strengthening the trade ?es between Israel and China; the Chinese government is reviewing the merits of a free trade agreement with Israel. § Peru and Israel commiked to agricultural coopera?on and coopera?on on water projects and industrial security. § Israel and the EU signed an open skies agreement § Three agreements between Israel and Colombia were signed: a free trade agreement, an innova?on agreement, and an avia?on agreement. § The UN held an Israel-‐led panel on entrepreneurship as a means of figh?ng poverty and unemployment. § Lockheed Mar?n will set up an Israeli research & development center. § India and Israel agreed to start a high-‐tech trade fund to enhance ?es between Israel’s innova?ve IT sector and India’s burgeoning hi-‐tech manufacturing sector.

Equity Market

Israel Non-‐Government Bond Index (Jan 2010 – June 2013)

Corporate Pyramids A major issue being dealt with by the Israeli government is the concentra?on in the economy caused by Israel’s notorious corporate pyramid holding structures. Corporate Pyramids reduce compe??on in the economy and create moral hazards by separa?ng corporate cash flows from the decision-‐making process. The Knesset Finance Commikee approved a ‘pyramid clause’ in the bill on Concentra?on in the Economy, limi?ng pyramids to just two levels and ordering the separa?on of financial and non -‐financial holdings. A poten?al result is a further reduc?on in the number of TASE-‐listed companies as many lower-‐?er holdings of these pyramids will either be merged or spun off and listed on interna?onal exchanges. Investors in Israeli equi?es should begin taking this issue into considera?on in developing their Israel Global Equity investment strategy. In the long run, the laws addressing concentra?on in the economy will benefit the local markets and the Israeli consumer, but there will be growing pains associated with these pro-‐market reforms.

12 These are not recommendations to buy or sell any security


The Tel Aviv Stock Exchange has been plagued in recent quarters by steadily declining trading volumes. This has prompted officials to seek paths to higher volumes and more liquid markets. More efficient and liquid markets will encourage more private Israeli companies to list on the local stock exchange and retain Israel as their place of business rather than selling out, some?mes prematurely, to private equity or interna?onal companies. An April 9th Globes’ ar?cle stated that 100 companies chose to delist from the TASE between 2010 and 2012. The disconnect between Israel’s economy and corporate sector ability to generate earnings and the efficiency of the equity markets there is blatant. Mellanox Technologies is amongst the latest companies to announce it will delist its shares from the TASE and have its shares listed solely on the NASDAQ exchange. As more companies delist from the local exchange, the decision to allocate funds to Israeli investment vehicles becomes more complex and less appealing.

Number of Listed Companies 2013/2012

Market Cap (USD) Daily Turnover

(USD mm) 2013 YTD/2012

521/556 171.6 Billion 302/279

Number of Public Issues 2013 YTD/

2012

New Capital Raised (USD) 2013YTD/2012

44/66 451 million/1.06 billion

TASE Equity and Conver5bles Market Vitals at June 28, 2013

Israel Economic Review & Outlook Israel’s GDP Growth Factors

Economic ac?vity began to improve in early 2013 but more recent indicators point to a slowdown in the growth rate of economic ac?vity. The consumer confidence index has fallen by over 22 points since April. The greatest concern is that there is a marked slow down in investment expenditures though consumer spending remains quite strong. The Bank of Israel raised its 2013 GDP forecast slightly to 3.8% (2.8% excluding the effects of natural gas). The Bank of Israel lowered its 2014 GDP forecasts slightly to 3.2% from 4.0% previously, or 2.5% excluding the effects of natural gas produc?on.

Fiscal Policy The Israeli government approved the 2013-‐2014 budget. The approved budget allows for an increase in public expenditure of 7% in 2013 but only 1.1% in 2014. The budget includes spending cuts across most ministries as well as tax increases, including another 1% rise in t he VAT. In the first half of 2013, the government’s budget deficit was NIS 4.3 billion which was lower than the path consistent with the deficit ceiling for 2013 of 4.65% of GDP. Tax receipt trends indicate stability in tax collec?on.

Inflation and Monetary Policy The Bank of Israel lowered the policy interest rate several ?mes in 2012, capped off by a 25 basis point cut in December. The policy rate has since been lowered by 25 bps two ?mes to 1.75% by the end of the first quarter and 1.25% by the end of the second quarter. The consumer price index in May increased by 0.1 percent, which was below the average projec?on of 0.3 percent. The CPI over the trailing twelve month period ending May 2013 was 0.9%, below the lower bond of the BOI’s target rate. This suggests that natural gas produc?on is contribu?ng to a decline in fuel prices but also that economic growth is slower than expected and that the BOI may leave its policy interest rate at the record low level of 1.25% for quite some ?me.

New Israeli Shekel Performance The Shekel was one of the strongest developed market currencies versus the Euro and the Dollar in Q1 2013, and was a bit vola?le in Q2. In Q2 2013, the BOI lowered its policy interest rate and intervened in the foreign exchange markets to help ease upward pressure on the shekel in order to support Israel’s export and manufacturing sectors. The Shekel’s strength vs the US Dollar over the past six months is especially impressive considering that the dollar strengthened against most other world currencies. We have been akribu?ng the strength of the shekel to rela/vely high interest rates, rela/vely high economic growth, economic and financial stability and resiliency, as well as to structural shi]s in Israel’s balance of payments picture deriving from the emerging energy industry there.

13

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Israel GDP Growth Israel vs OECD Members



Source: OECD * Es?mates as of June 2013

Jan. 1 2010 -‐ June 28 2013

Jan. 1 2010 -‐ June 28 2013

Israeli Market’s Geopolitical Front

The divergence between Israeli and U.S. equi?es over the past nine months or so represents the largest performance differen?al between the two markets in recent years, and we akribute this primarily to excessive fears of geopoli?cal risks in the local market. As we have seen repeatedly, investors in Israeli markets typically overreact to geopoli?cal risks and long-‐term investors are rewarded with strong outperformance once fear-‐based selling subsides. Figh?ng from the civil war in Syria has spilled over into neighboring Lebanon and Syrian President Assad has drawn support from Iran and Hezbollah in puqng weapons and soldiers on the ground in Syria. Russia con?nues to support President Assad and President Pu?n intends to impede on any Western military effort to support the rebellion in Syria. Turkey has become the latest country in Israel’s neighborhood to see mass an?-‐government protests, and massive an?-‐government protests combined with an asser?ve military has toppled the Morsi government, amoun?ng to a second revolu?on in Egypt in three years. Pales?nians in Gaza fired several rockets indiscriminately into Southern Israel this month. Israel responded with one targeted strike by the Israeli Air Force. So far, these events have had a limited effect on Israel and Israel’s economy.

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Documents

BlueStar Israel Equity Update€¦ · Index in Q1 2013 2-5. About the BlueStar Israel Global Index (including Risk/ Return Data) 6-10. Technical Analysis 11. Israeli Sector Highlights