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These are not recommendations to buy or sell any security © 2013 BlueStar Global Investors, LLC

BlueStar Israel Equity Update First Quarter 2013

What’s Inside

1. The

BlueStar

Israel Global

Index in 2012

YTD

2-4. About the

BlueStar Israel

Global Index

and

Risk/Return

Data

5-8. Technical

Analysis

9. Israeli

Sector

Highlights

10. Capital

Markets

11. Israeli

Economic

Review

12. Geopolitical

Environment

Global equities gained in Q4 to round out a strong 2012. Israeli Global Equities

built on the foundation set by Q3’s rebound.

The BlueStar Israel Global Index (BIGI) finished off 2012 with a gain of 5.57%

in Q4, helping the index to gain 8.63% for the year. The S&P 500 lost -0.38% in

Q4 and gained 16% in 2012 while MSCI EAFE and EM index gained 6.6% and

5.6% in Q4 respectively, and 17.9% and 18.63% for 2012 respectively.

Israel’s financial, oil & gas, and technology companies were relatively strong

into the close of the quarter and led Global Israel Equities through Q4 2012; the

gain in Israeli Global Equities was broad based, though domestic-oriented

companies were relatively strong in the final months of the year.

Volume on the TASE steadily declined throughout 2012 and prompted officials

to take action to reverse this trend; volumes could begin to increase as flows to

equity mutual funds gain positive momentum; Israel’s corporate bond indexes

finished 2012 and began 2013 with a strong surge, a sign that the worst may be

behind in Israel’s credit market chill.

Q4 witnessed Israel’s first large military campaign in several years, Operation

‘Pillar of Defense’ against Hamas terrorists in Gaza. Israel’s economy and

financial markets displayed resilience throughout the crisis and exploded to the

upside upon the operation’s completion. The first quarter of 2013 sees Prime

Ministerial elections and government budget decisions.

Q4 2012 in Review & 2013 Outlook

BIGI Performance (BlueStar Israel Global Index, Jan 2010- December 2012)

1

70

80

90

100

110

120

130

140

Q1 2010

Q2 2010

Q3 2010

Q4 2010

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

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.

Comparative Sector Weights

Long- Term Returns Five Year Correlations

Comparative Risk

*Annualized Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Dec 31 2012

*Annualized Inception Date: Dec. 1992 Source: BlueStar Global Investors LLC Dec 31 2012

Source: BlueStar Global Investors LLC Dec 31 2012

Source: BlueStar Global Investors LLC Dec 31 2012


Sectors BIGI MSCI-

EIS

FTSE

Israel TA-25 TA-100

Technology 28.8% 9.8% 6.8% 12.0% 11.6%

Health Care 23.2% 23.3% 44.8% 19.2% 22.2%

Financials 18.3% 32.3% 22.1% 30.6% 29.6%

Oil & Gas 8.9% 5.2% 6.7% 12.7% 10.5%

Basic Materials 7.6% 14.7% 10.7% 13.1% 11.5%

Industrials 3.6% 3.7% 1.7% 2.2% 3.6%

Consumer Services 3.5% 1.0% 0.8% 0.0% 2.1%

Telecommunications 3.1% 6.3% 4.4% 7.9% 5.8%

Consumer Goods 1.9% 3.2% 1.6% 2.2% 2.6%

Utilities 0.9% 0.6% 0.3% 0.0% 0.5%

Q4 ‘12 2012 *3yrs. *5yrs. *10yrs. *15yrs. *Inception1

ACWI 5.21% 13.51% 17.35% 21.60% 16.79% 17.08% 15.77%

EAFE 4.19% 16.58% 19.59% 23.48% 18.43% 18.00% 17.02%

MSCI

EM 9.68% 19.66% 21.79% 29.04% 24.13% 25.60% 24.10%

S&P 500 5.22% 10.52% 15.30% 19.04% 14.77% 16.24% 15.12%

MSCI

Israel 14.86% 18.99% 21.19% 22.24% 19.98% 24.72% 24.34%

TA-100 9.58% 17.57% 20.80% 26.36% 23.23% 25.01% 24.86%

TA-25 9.45% 18.31% 21.21% 26.22% 23.46% 25.25% 24.88%

BlueStar 5.43% 16.38% 20.90% 24.97% 21.74% - -

Q4 ‘12 2012 *3yrs. *5yrs. *10yrs. *15yrs. *Inception1

ACWI 3.01% 16.80% 7.19% -0.61% 8.66% 5.01% 7.66%

EAFE 6.60% 17.90% 4.04% -3.21% 8.70% 4.79% 6.62%

MSCI

EM 5.61% 18.63% 4.98% -0.61% 16.88% 9.24% 9.02%

S&P 500 -0.38% 16.00% 10.87% 1.66% 7.10% 4.47% 8.40%

MSCI

Israel -3.84% -3.91% -9.94% -4.28% 9.97% 5.93% 5.40%

TA-100 4.59% 9.52% -0.11% -1.30% 14.89% 8.54% 7.29%

TA-25 4.82% 11.57% 1.56% 0.08% 16.25% 9.11% 7.72%

BlueStar 5.57% 8.63% 1.45% 1.92% 17.48% - -

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 0.93 1.00

S&P 500 0.97 0.86 0.92 1.00

MSCI

Israel 0.71 0.77 0.69 0.64 1.00

TA-100 0.84 0.87 0.81 0.78 0.86 1.00

TA-25 0.85 0.88 0.82 0.79 0.86 0.99 1.00

BlueStar 0.86 0.88 0.84 0.80 0.88 0.98 0.97

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3

BlueStar Israel Global Index Constituents and Weights


Company Name Ticker ExchangeIndex Weight as

of Jan 2 2013

1 Teva Pharmaceutical Industries TEVA TASE 11.72%

2 Perrigo Co PRGO NASDAQ 7.98%

3 Check Point Software (US) CHKP NASDAQ 6.57%

4 Amdocs Ltd DOX NYSE 4.93%

5 Israel Chemical Corp ICL TASE 4.55%

6 Bank Leumi Le-Israel BM LUMI TASE 3.87%

7 Bank Hapoalim BM Reg POLI TASE 3.79%

8 VeriFone Systems Inc PAY NYSE 3.18%

9 Israel Corp ILCO TASE 2.26%

10 MELLANOX TECH MLNX NASDAQ 2.11%

11 BEZEQ ISRAELI TELECOM CORP BEZQ TASE 2.02%

12 Nice Systems Ltd NICE TASE 1.89%

13 Isramco Negev 2 LP ISRAp TASE 1.42%

14 Israel Discount Bank 0.1 DSCT TASE 1.25%

15 Mizrahi Tefahot Bank Ltd MZTF TASE 1.19%

16 Avner Oil & Gas Ltd LP AVNRp TASE 1.04%

17 Delek Group Ltd DLEKG TASE 1.00%

18 Electronics For Imaging EFII NASDAQ 0.97%

19 Gazit Globe 1982 Ltd GLOB TASE 0.96%

20 Azrieli Group AZRG TASE 0.95%

21 Ezchip Semiconduct EZCH TASE 0.95%

22 Playtech PTEC LN 0.94%

23 Elbit Systems Ltd ESLT TASE 0.94%

24 Comverse Technology Inc. CMVT NASDAQ 0.89%

25 SodaStream International Ltd SODA NASDAQ 0.87%

26 Taro Pharmaceutical Industries TARO NYSE 0.81%

27 LivePerson Inc LPSN NASDAQ 0.79%

28 VERINT SYSTEMS VRNT NASDAQ 0.78%

29 Delek Drilling LP DEDRp TASE 0.78%

30 First Intl Bank of Israel FTIN TASE 0.77%

31 Paz Oil Company Ltd PZOL TASE 0.73%

32 Delek US Holdings DK NYSE 0.68%

33 Osem Investment OSEM TASE 0.68%

34 ALLOT COMMUNICATIONS LTD ALLT NASDAQ 0.66%

35 Harel Insurance Inv Ltd 1 HARL TASE 0.63%

36 Ratio Oil Exploration L.P. RATIp TASE 0.62%

37 Migdal Insurance Hdlgs MGDL TASE 0.62%

38 Imperva Inc IMPV NYSE 0.61%

39 Radware Ltd RDWR NASDAQ 0.59%

40 Partner Communications Co Ltd PTNR TASE 0.58%

41 Strauss Group STRS TASE 0.58%

42 Oil Refineries Ltd ORL TASE 0.57%

43 Aloni Hetz Properties ALHE TASE 0.56%

44 Frutarom FRUT TASE 0.56%

45 Cellcom Israel Ltd. CEL TASE 0.54%

46 Alon Usa Energy ALJ NYSE 0.53%

47 Clal Insurance Enterprises Hldgs CLIS TASE 0.52%

48 Retalix Ltd RTLX TASE 0.51%

Company Name Ticker ExchangeIndex Weight as

of Jan 2 2013

49 Shikun & Binui Ltd. SKBN TASE 0.50%

50 Protalix Biotherapeutics Inc PLX AMEX 0.49%

51 Ormat Technologies ORA NYSE 0.48%

52 Ceva Inc CEVA NASDAQ 0.48%

53 Given Imaging Ltd GIVN NASDAQ 0.46%

54 Orbotech Ltd (US) ORBK NASDAQ 0.44%

55 Syneron Medical Ltd ELOS NASDAQ 0.44%

56 Delek Energy Systems Ltd DLEN TASE 0.44%

57 Ormat Industries ORMT TASE 0.43%

58 Space-Communication Ltd. SCC TASE 0.41%

59 Clicksoftware Technologies Ltd CKSW NASDAQ 0.40%

60 888 Holdings Plc 888 LN 0.39%

61 Menorah Insurance Co Ltd 1 MMHD TASE 0.39%

62 PROLOR Biotech Inc. PBTH AMEX 0.38%

63 AMOT Investment Ltd AMOT TASE 0.38%

64 Delek Automotive Systems Ltd DLEA TASE 0.38%

65 MELISRON Ltd. MLSR TASE 0.38%

66 NITSBA Hldgs (1995) Ltd NTBA TASE 0.37%

67 Clal Industries CII TASE 0.36%

68 Ituran Location & Control Ltd ITRN TASE 0.36%

69 Nova Measuring Instruments Ltd NVMI TASE 0.36%

70 Shufersal Ltd. SAE TASE 0.36%

71 Jerusalem Oil Exploration JOEL5 TASE 0.35%

72 Electra (Israel) ELTR TASE 0.35%

73 Gilat Satellite Networks GILT TASE 0.35%

74Rami Levi Chain Stores Hashikma Marketing Ltd.RMLI TASE 0.35%

75 Israel Phoenix Assurance 1 PHOE1 TASE 0.34%

76 Avgol Industries 1953 Ltd AVGL TASE 0.34%

77 magicJack VocalTec Ltd CALL NASDAQ 0.33%

78 Naphtha Israel Petroleum Corp NFTA TASE 0.33%

79 Kamada KMDA TASE 0.32%

80 Airport City Ltd ARPT TASE 0.31%

81 Bayside LandCorp 1 BYSD TASE 0.31%

82 Evogene Ltd. EVGN TASE 0.31%

83 Matrix MTRX TASE 0.31%

84 Cinema City International NV CCI Warsaw 0.31%

85 Caesar Stone Sdot Yam Ltd CSTE NASDAQ 0.30%

86 PLURISTEM THERAP PSTI NASDAQ 0.30%

87 Givot Olam Oil Exploration L.P. GIVOp TASE 0.30%

88 Africa Israel Properties AFPR TASE 0.30%

89 Babylon Ltd. BBYL TASE 0.30%

90 DSP Group DSPG NASDAQ 0.29%

91 Africa-Israel Inv Ltd AFIL01 TASE 0.28%

92 Ceragon Networks [US Listing] CRNT NASDAQ 0.27%

93 Formula Systems (1985) Ltd FORT TASE 0.26%

94 Koor Industries KOR TASE 0.26%

95 Jerusalem Economic Corp (ECJ) ECJM TASE 0.24%

96 Clal Biotechnology Industrie CBI TASE 0.22%

As of Jan 2, 2013

4

BlueStar Israel Global Index Performance Attribution and December 2012 Rebalance

BIGI Internal Characteristics Attribution

Currency Attribution Exchange-Related Attribution


Total Index Weight Listed on Local Exchange(s) (Dec

31 2012)

Local Currency Performance vs USD

(Q4 2012)

Attribution of Currency Performance to BIGI Performance

Israel – New Israeli Shekel (TASE)

60.35% 4.77% 2.88%

US - US Dollar (NYSE, NASDAQ, AMEX)

38.01% 0.00% 0.00%

UK – GB Pound (London)

1.33% -0.45% 0.00%

Poland – Polish Zolty (Warsaw)

0.31% 1.99% 0.00%

Total Direct Effect of Currency Fluctuation on BIGI Price Level

- - 2.88%

Total Index Weight (Dec 31

2012)

Attribution of Category to BIGI

Performance (Q4 2012)

Dual-Listed Constituents

30.90% 0.86%

Non-TASE Constituents

37.40% -1.11%

Non-TASE Technology

Constituents 22.82% -0.73%

Taro Pharmaceutical Industries (TARO:TASE; TARO:NASDAQ) is a multi-national pharmaceutical and research company. The company develops, manufactures and markets prescription and over-the-counter drugs primarily in North America and Israel. Taro entered the BIGI index with a 0.81% weight. Allot Communications (ALLT:TASE; ALLT:NASDAQ) develops bandwidth management hardware and software products. The company’s product offering includes the industry’s broadest range of solutions that work with any network configuration. Allot entered the BIGI index with a 0.66% weight. Nova Measuring Instruments (NVMI:TASE; NVMI:NASDAQ) designs, develops, and produces integrated process control metrology systems used in the manufacturing process of semiconductors. Nova entered the BIGI index with a 0.36% weight. magicJack Vocaltec (CALL:NASDAQ) provides VoIP (Voice over Internet Protocol), the “soft phone” and the magicJack products. With magicJack’s products, users can connect a smart phone or land line phone directly into a broadband modem/router and have it function as a stand alone phone without connecting to a computer. The company entered the BIGI index with a 0.33% weight. Evogene (EVGN:TASE) is a leader in the agro-technology field. The company is a developer of improved plant traits such as yield and drought tolerance through the use of genomics. The company entered the BIGI index with a 0.31% weight. Pluristem Therapeutics Inc. (PSTI:TASE; PSTI:NASDAQ) is a bio-therapeutics company involved in commercializing non-personalized cell therapy products for the treatment of severe degenerative and autoimmune disorders. Pluristem entered the BIGI index with a 0.30% weight. DSP Group (DSPG:NASDAQ) is a global provider of wireless chipset solutions for converged communications at the home and office. The company entered the BIGI index with a 0.29% weight.

Introducing BIGI’s Newest Constituents

5

BlueStar Israel Global Index Technical Analysis

The technical picture for Israeli stocks, as measured by the broad-based BlueStar Israel Global Index (BIGI), consolidated throughout December after breaking through important trend lines, holding key support levels, and breaking through multi-month highs in November. In early November, Israeli stocks failed to break the 220 resistance level represented by the dotted green line on the two-year chart. Instead, as Operation Pillar of Defense progressed, Israeli equities retreated to the key technical area of 200-205. The market quickly recovered, confirming that the 200 index level is a strong area of support for the index, coinciding with the multi-year thin red support line. This area was confirmed after a test of the former downtrend line which was broken in October/November, and it also coincides with the relatively new black uptrend line originating with the Q3 2012 low. As December was a relatively quite month after the roller coaster of November, we view the consolidation near the 220 level as constructive to our overall bullish view of Israeli Global Equities. The short-term outlook for Israeli Global Equities is now solidly bullish, though there is always the chance that the Index will come back in to retest the new uptrend line. If there are no negative catalysts, we expect the upward momentum to carry Israeli equities higher to strong resistance near the 230 level.

Source: BlueStar Global Investors LLC (Jan 1 2010- September 30 2012)

To review the long-term analysis of the patterns on the five-year chart on the following page, BIGI, like other Israeli indexes, bottomed in late October 2008 and again in early March 2009, followed by a powerful rally into spring 2010. After a short correction, BIGI surged to lifetime highs in late 2010 through spring 2011, only to correct deeply again amidst Europe’s financial crisis, Israel’s domestic social protest and nuclear threats from Iran. It found solid support during late 2011 at the key technical level of 195. This corresponds with an uptrend beginning with the early 2009 bottom (solid red uptrend line), and the horizontal support zone dating back to autumn 2007 (solid red line), also at approximately the 195 BIGI level. As noted above, this level was repeatedly probed in June and July 2012, and again later in the summer, and by the end of last month and Q3, has confirmed the support at this level.

BIGI Daily Chart 30-Day Simple Moving Average 100-Day Simple Moving Average


6

BlueStar Israel Global Index Technical Analysis

The longer-term outlook for Israeli equities is still cautiously bullish and will become more bullish only if the index breaks back into -- and ideally through -- the channel connecting the 2008/2009 lows, as illustrated in the BIGI five-year chart, which spans the entire 2008-2009 global financial crisis. This corresponds with the 220-225 levels mentioned above. BIGI breached the lower band of the channel but did not break through it in October, and subsequently dropped back to test the 200 level, as noted above. The index has flirted with breaking into this channel throughout Q4 2012. If BIGI enters into and remains within the aforementioned channel, a rally to strong resistance is projected to be at 239/240, as highlighted by the solid green line on the five-year chart. If this resistance is broken, we see the projected upside potential of the index to be at the 300 level by mid 2013, though most likely following a consolidation at the 2011 high of 275.

From a risk management perspective, the revised stop-loss at the 195/197 level articulated in our September and October Outlooks remains valid, but those with a shorter-term perspective should move their stop-loss higher to 205/210 in BIGI as we begin the new year. Investors can also view a pull-back below the newly established upward trend line, currently at the 208-210 level, as a warning signal. If these levels are breached and then confirmed with a weekly close of BIGI below 195, the longer-term outlook will shift dramatically, and any rallies should be sold. A breach of 195 would increase the likelihood that the spring 2011 peaks represent the ‘head’ of a massive ‘head and shoulders’ pattern which would project a major decline to around 135, just above the autumn 2008/March 2009 lows. A rally of BIGI decisively above the 220 level would confirm that this major multi-year support level will have held, and will potentially form a base for a sustained rally . If the latter scenario develops, we would expect medium and long-term targets as high as the 275 and 300 levels, respectively.

Source: BlueStar Global Investors LLC (January 1 2007- December 31 2012)

BIGI Daily Chart 50-Day Simple Moving Average 200-Day Simple Moving Average


7

Technical Analysis: Top Ten Holdings (Weights)

TEVA (11.72% of BIGI)

Check Point Software (6.57%)

Israel Chemicals (4.55%) Amdocs (4.93%)

Perrigo Co. (7.98%)

PE: 15.47 Yield: 2.72%

PE: 10.78 Yield: n/a


PE: 15.26 Yield: 1.47%

PE: 23.02 Yield: 0.34%


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

8 8

Technical Analysis: Top Ten Holdings ( Weights)

Mellanox Technologies (2.11%)

Verifone Systems (3.18%) Israel Corp (2.26%)

Bank Leumi (3.87%) Bank Hapoalim (3.79%)

PE: n/a Yield: n/a PE: 53.83*

Yield: n/a


PE: 8.35 Yield: n/a


* Q3 2012 saw a severe one time drop in earnings


Israeli Sector Spotlight

Oil & Gas companies were among the top three performing sectors in each month of the fourth quarter. They comprised the second greatest gaining group of Israeli Global Equities in Q4 2012 and the third greatest gaining group in Q3 2012. After the Tzemach committee announced guidelines for the export of natural gas from Israel during the third quarter of 2012, global oil and gas majors starting bidding for a stake of the Leviathan licenses. Australia’s Woodside Energy was victorious and purchased one-third of the rights to the Leviathan licenses at a valuation 70% higher than most analysts’. This news sent Oil & Gas stocks soaring higher and set them on a solidly upward trajectory. Woodside Energy will help position Israel as an important player in the global LNG market with distribution capabilities especially in Asia. However, Europe will also be an export destination for Israeli gas as Greece, Cyprus and Israel discuss an energy corridor where Cypriot and Israeli gas would flow first to Greece and then on to markets throughout Europe. The geopolitical risk component of the Leviathan project was mitigated in November as Turkey’s Minister of Foreign Affairs, said that “construction of a pipeline to Turkey is the best way to export natural gas, both in terms of economics and in terms of energy.” This along with other signs of easing tensions between the two former allies shows that Israel and Turkey could become partners in exporting gas to Eastern Europe. Lastly, several year-end reports have stated that the natural gas industry will contribute to nearly one-third of Israel’s projected 3.2% GDP growth in 2013. Gas deliveries from the Tamar site are to begin in the spring. The Tamar reserves have enough natural gas to meet domestic demand for 10 years. Additionally, projects to build on-shore and off-shore gas terminals have been approved and licenses have been granted to begin work on these projects. Israel’s energy independence is near and is sure to give a boost to Israel’s international trade balance, the Shekel, the government’s budget, and Israelis’ discretionary budget constraints as energy costs will eventually fall.

Energy

Typically, the sector or group of equities that lead a market lower will help to lead the recovery. The slide in Israeli equities during the later part of 2011 through mid 2012 was lead by Israeli financial companies. In Q3, the Financials began to recover and were among the top performing sectors in each month of Q4 2012. The Bank of Israel lowered its policy interest rate twice during the fourth quarter helping to add liquidity to Israel’s credit markets and ease Shekel appreciation. Additionally, the largest banks have exceeded required core capital

9

adequacy ratios adding to the stability of Israel’s financial system. The Bank of Israel, in the fourth quarter, began allowing Israeli banks to use deferred taxes as part of a bank’s capital. The strong recovery in Israel’s financial sector was broad based with most components of this sector gaining throughout the quarter, and all subsectors gaining as well, including banks, insurance companies, real estate companies, and holding companies. A general rise in Israel’s equity markets will typically lead to a strong rise in Israel’s financial sector stocks because of the holding-structure nature of Israel’s economy. An industry directly affecting all financial subsectors is the housing market. Laws implemented during Q3 to tighten the loan to value ratio on banks’ mortgage portfolios began to show signs of slowing the rise in housing prices only towards the end of the quarter. We believe the main component of the solution to Israel’s housing price rise will be on the supply-side rather than a reduction in demand, as Israel’s population is young and growing.

Financials Sector

As defined by BlueStar

Indexes

Q4 2012

Performance

Q3 2012

Performance

Q2 2012

Performance

Q1 2012

Performance

Financials 4.45% 0.73% -2.66% 0.89%

Oil & Gas 2.15% 0.76% -1.57% 0.30%

Technology 1.54% 1.40% -4.51% 3.77%

Consumer Goods 0.12% -0.03% -0.60% 0.05%

Industrials 0.11% 0.26% -0.79% 0.26%

Consumer Services 0.04% 0.22% -0.40% 0.22%

Basic Materials -0.16% 0.93% -0.89% 0.58%

Utilities -0.30% -0.07% -0.12% 0.06%

Telecommunications -0.40% 0.25% -2.12% -1.08%

Health Care -1.97% 0.31% 0.13% 2.07%


Developments in the Corporate Arena and Capital Markets

Israel’s Global Footprint

A key source for Israel’s economic resiliency and growth is its ability to tap international markets and forge economic and security agreements with foreign governments and agencies. In the fourth quarter of 2012, several such developments occurred, including: Teva opened a plant worth $110 million in Hungary, had a joint venture with Proctor and Gamble approved by the European Union, and entered into a partnership in South Korea as the company shifts focus to tapping Asian markets Microsoft’s Israel incubator opened its second session after graduates of its first session raised $6.5 million in the three months following the conclusion of the session The government of Singapore's venture capital fund is set to invest in Israel as part of a collaboration with Rosario Capital; the fund has $150 million in AUM The Ports development Company and Indian partner, Cargo Motors, have passed the prequalification stage in a tender for a roll on -roll off wharf at the Chennai port Israel Securities Authority joined the International Organization of Securities Commission’s European regional committee The European parliament approved a pact making it easier for Israeli pharmaceutical companies to export to the EU The UN passed an Israeli resolution stating that entrepreneurship is a means of fighting poverty and aids in economic development The Ministry of Finance is in talks with the US treasury on reciprocal transfer of bank account information to help Israeli banks deal with strict US regulations

Equity Market

Israel Non-Government Bond Index (Jan 2010 – Dec 2012)

Debt Market

Perhaps the most encouraging development in Israel’s capital markets, above the mid-year reversal in equities, came in the final months of the year. The recovery in Israel’s corporate debt market shows that the cost of capital in Israel has decreased and that some risk has been removed from the valuation of financial instruments. Israel’s debt markets had been in a state of disarray with large amounts of refinancing and debt restructurings taking place and due to take place in the near future. With the Bank of Israel lowering interest rates twice in Q4 2012 and foreign central banks also reducing interest rates, there is a warming of the chill in Israel’s credit markets. In Q4 2012 over NIS 5 billion in corporate debt was raised and, as shown on the chart to the right, overall corporate bond prices have jumped.

10


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, sometimes prematurely, to private equity or international companies. Additionally, a more liquid equity market could help attract more foreign investment in Israeli equities. Encouraging signs for the TASE emerged in Q4 2012 and asset flows to mutual funds increased. Two ideas for reviving trading volumes have emerged in the fourth quarter: to extend trading hours to 5:30 p.m. Israeli time to increase the overlap of trading times with foreign markets, and to have Israel join European regional indexes enticing money managers to allocate a portion of a Developed Market or Europe themed portfolio to Israeli equities.

Israel Economic Review & Outlook

Israel’s GDP Growth Factors Israeli Gross National Product for 2012 is estimated to be NIS 930 billion and Gross Domestic Product growth is estimated to be 3.2% over 2011. This represents Israel’s lowest level of GDP growth in several years, excluding 2009 during the global financial crisis. However, Israel is still among the top economic performers of all OECD countries and the top Western OECD economy in 2012. Israeli GDP growth per capita is also near the top of all OECD members. Predictions for 2013 growth range from 2.9% to 3.9%. Several investment houses with operations in Israel are predicting 2.9% to 3.0% GDP growth while the OECD and the Ministry of Finance expect around 3.6% growth in 2013 and 3.9% growth in 2014. Most sources agree, though, that Israel’s natural gas industry will account for 1% of Israel’ GDP growth in 2013. They warn that this will be unlikely to have a significant impact on government receipts or the rate of unemployment.

Fiscal Policy The government budget deficit will be the most prominent source of volatility in Israeli markets during the first quarter of 2013. The government's debt to GDP ratio has been on a steady downward path since the shift to privatization in 1987 and has declined sequentially in each year since 2004, with the exception of 2009. The gross debt to GDP ratio most likely rose in 2012 from its level in 2011. The Bank of Israel believes the government elected in late January will be forced to raise taxes while the Ministry of Finance disagrees. The budget deficit for 2012 is estimated to be 4.1% of GDP, around 2 percentage points above the target. The issue of government spending and potential austerity measures could rattle markets in the beginning of the New year.

Inflation and Monetary Policy The Bank of Israel lowered the policy interest rate several times in 2012, capped off by a 25 basis point cut in December. The policy rate beginning 2013 is 1.75% . In light of the November CPI declining by 0.5%, the third straight monthly lower-than-expected CPI figure, the apparent slowdown in the rise of housing prices, slower global economic growth, and global monetary easing, the Bank of Israel wanted to give growth a better chance and to help ease the Shekel appreciation which hurts exporters.

New Israeli Shekel Performance Despite lowered interest rates, fiscal uncertainty, and Operation Pillar of Defense, the Shekel continued to climb against the US Dollar and also slightly appreciated against the Euro in the second half of 2012. We attribute the strength of the shekel to relatively high interest rates, relatively high economic growth, economic and financial stability and resiliency, as well as to structural shifts in Israel’s balance of payments picture deriving from the emerging energy industry there.

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Country 2009 2010 2011 2012 2013

Israel 0.8 4.8 4.8 3.2 3.6

U.S. -3.5 3.0 1.7 2.4 2.6

China 9.2 10.4 9.2 8.2 9.3

France -3.0 1.6 1.7 0.6 1.2

Germany -5.1 3.6 3.1 1.2 2.0

Brazil -0.3 7.6 2.7 3.2 4.2

OECD Total -3.8 3.2 1.8 1.6 2.3

Shek

el S

tren

gth

Shekel/US Dollar

Shekel/Euro Rate

Shek

el S

tren

gth

Israel GDP Growth Israel vs OECD Members

Israel GDP Growth vs Other Major Economies


* Estimates as of December 2012

Israeli Market’s Geopolitical Front

The divergence between Israeli and US equities over the past sixth months or so represents the largest performance differential between the two markets in recent years, and we attribute this mostly to overblown fears of geopolitical risks in the local market. As we have seen repeatedly, investors in Israeli markets typically overreact to geopolitical risks and long-term investors are rewarded with strong outperformance once fear-based selling subsides. Geopolitical and political risks do exist, however, and they will likely continue to pressure Israeli equities well into the first half of the New Year. Tensions have diminished between Israel and Hamas in Gaza. Once again, though, Israel’s economy and financial markets showed resilience throughout the latest military conflict and, once the operation came to a close, Israeli equities soared higher. Israel and Egypt are now allowing more construction materials to enter into Gaza and, if the calm persists, more eases will follow. This, for the time being, is a positive omen for Israeli equities. However, attention has been shifted to international pressure on Israel over building in the contested or “settlement” areas. Australia and Brazil have become the latest countries to summon envoys over the issue, and the EU said that all of its economic agreements with Israel must “unequivocally and explicitly indicate their inapplicability to the territories occupied by Israel in 1967, namely the Golan Heights, the west bank, East Jerusalem, and the Gaza Strip.” Lastly, on a positive note, Turkey will allow the resumption of NATO cooperation with Israel as a third-country NATO partner. The civil war in Syria has continued to deteriorate. Fighting has in some instances spilled over into Lebanon and Turkey and there is still the potential for the violence to spill over into the broader region. In January, Russia has signaled that they are pulling support for the Assad regime. Sanctions on Iran have proven quite effective though have yet to bring the Iranians back to the negotiating table on the issue of nuclear armament.

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