All the talk about a possible Israeli air strike against Iran’s nuclear facilities doesn’t seem to be scaring away many investors in the Jewish state, at least not yet.
The benchmark Israeli stock index, the TA-25, has eked out a 2.2% gain this year, while a large Israel ETF, the iShares MSCI Israel Capped Index (NYSE:EIS), is up about 5% in 2012. That’s remarkable considering the publicity about the Iran problem and its potential to start a new Middle East war.
Israel’s economy, though, is notably resilient. Experts expect that the country’s GDP growth will slow in 2012 to about 3%, but that’s still ahead of the U.S. and Europe. And observers such as the International Monetary Fund have found much to like about Israel, such as record-low unemployment, government spending controls and depressed inflation.
For U.S. investors looking for a pure play for Israel, EIS works fine. The fund’s biggest holding is Teva Pharmaceuticals (NASDQ:TEVA), accounting for some 23% of its assets. Though that can be considered a weakness, it hasn’t been lately. Shares have gained almost 8% in 2012 on optimism that the drugmaker will profit from new products such as its generic version of the anti-depressant Lexapro.
Wall Street believes Teva has plenty of room to run. Analysts’ average one-year price target is $52.75, more than 22% higher than where it currently trades.
Though investors could just buy Teva shares, owning the ETF gives them exposure to one of the most dynamic economies in the industrial world. Israel is known for being a center of technological innovation. Many U.S. tech companies such as Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) have research centers there. More than 60 companies based in Israel are listed on the Nasdaq exchange, the second-highest total of any country behind the U.S.
EIS also has some holdings that U.S. investors would have difficulty buying as individuals but would probably want to own, and others that may have escaped their notice.
The ETF owns shares of Israeli bank stocks such as Bank Haopalim and Bank Leumi. These stocks are on the rise because the country’s central bank recently published capital ratio guidelines that were not as strict as many had expected. Merrill Lynch recently reiterated its buy rating on EIS holding Bezeq Israeli Telecommunication, arguing that the shares represent “a unique buying opportunity.” U.S. investors can purchase these shares only over-the-counter or in Israel.
Though Israel is the largest recipient of U.S. foreign aid, the relationship with Uncle Sam isn’t a one-way street, According to the U.S. Trade Representative, Israeli foreign direct investment in the U.S. totaled $7.3 billion in 2009, the latest data available, while sales of services in the U.S. by majority Israel-owned firms were $2.4 billion. Americans may not be aware that well-known companies such SodaStream (NASDAQ:SODA) are based in Israel but get most of their sales from the U.S.
Investing in Israel clearly isn’t for everybody, particularly those opposed to its policies. Investors also may be worried because Israel has lived under constant threat from its many enemies since it was founded in 1948. For investors who can overlook all that, the Jewish state can offer loads of potential opportunities.
–Jonathan Berr is long EIS,