The Israeli markets and related exchange traded funds could begin to strengthen after the Bank of Israel joined the growing group of central banks implementing loose monetary policies to foster growth.
Year-to-date, the Market Vectors Israel ETF (NYSEArca: ISRA) is up 2.3% and the iShares MSCI Israel Capped ETF (NYSEArca: EIS) is 3.3% higher.
Growth could begin to pick up speed after Israel’s central bank unexpectedly reduced its benchmark rate to a record 0.1% from 0.25% in an attempt to offset deflationary pressures, reports Alisa Odenheimer for Bloomberg.
The Bank of Israel is enacting looser monetary policies as it tries to stimulate a flagging economy that has expanded at its slowest pace in five years and reverse the decline in consumer prices.
The Israeli economy grew 2.9% in 2014, its weakest pace since 2009, and experienced several months of deflation, with consumer prices dipping 0.5% in the 12 months through January. In contrast, the country is aiming toward an inflation rate of 1% to 3% within a year.
The central bank may even contemplate a potential bond-purchasing program, or so-called unconventional tools, of its own if deflationary pressures persist.
The rate cut “is a preventative measure meant to avoid a slide into a deflationary reality,” Yaniv Pagot, chief strategist at Ayalon Group Ltd. in Ramat Gan, said in the article. “Quantitative easing steps in the not so distant future cannot be discounted.”
The Israeli shekel currency dipped over 1% to 3.9037 per U.S. dollar in response to the rate cuts. Potential Israel ETF investors should also be aware that the funds do not hedge currency risks, so a falling shekel currency could offset some gains since the underlying shekel-denominated asset growth will be converted into USD returns.
On the other hand, a weak shekel helps contribute to export growth. For instance, both ISRA and EIS include a heavy tilt toward Teva Pharmaceuticals (NYSE: TEVA) at 12.7% and 23.9%, respectively. [Indexology – Currency Wars: Pandering to Debase]
Market Vectors Israel ETF
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Max Chen contributed to this article.