Hezbollah Hasn't Hit Investment in Israel

By Aaron Katsman

Published August 04, 2006, issue of August 04, 2006.

Investors throughout the world are worried about the possibility of the war between Israel and Hezbollah spreading across the entire Middle East. That the Israeli market has held up quite strongly in the face of this war, then, points to an impressive maturation of Israeli investors over the last five years.

Let’s turn back the clock to the winter of 2001-2002, when the threat of Israel being pulled into a regional war with Iraq was very real. The global economy was reeling from the bursting of the high-tech bubble, the September 11 terrorist attacks and America’s declaration of war against Al Qaeda.

Domestic economic growth was at a standstill. Israelis were sending money abroad in droves. The shekel went into freefall versus the dollar, dropping by 15% in a matter of weeks. Interest rates on short-term Israeli government bonds went above 11%. The Tel Aviv stock exchange dropped by more than 50%. Pundits were warning that Israel was in real danger of becoming the next Argentina.

Now fast-forward to this past May. Israel’s 2005 GDP growth was the highest in the Western world, at 5.2%, and 2006 GDP growth was estimated at 4%. Unemployment was falling, the shekel was very stable and taxes continued to fall. And Warren Buffet made his largest international investment ever when he bought Iscar, the world’s leading innovator of metal-cutting tools and techniques for machining, for $4 billion. As a result, the Tel Aviv stock exchange was trading at an all-time high.

Can this stellar economic performance survive the war Israel has been thrust into by Hezbollah? The maturity exhibited by Israeli financial markets during this current crisis strongly indicates yes.

After an initial two-day drop, the shekel has since returned to its prewar levels. While the immediate stock market reaction during the first two days of the war was a 10% drop on the Tel Aviv stock exchange, the market subsequently moved up, meaning that the stock exchange has in fact only dropped by 5% since the start of the war. The market looks as if it will weather this storm. This is certainly something that would have been unimaginable five years ago.

The question is how much of an impact these current events will ultimately have on the Israeli economy. The Fitch Credit rating agency says that it expects Israel’s 2006 GDP growth to be more than 4%, which correlates to a consensus among Israeli economists expecting only a slight decline in GDP of roughly 2 to 4 basis points due to these events.

Fitch also said that the Israeli economy is stable and strong enough to make it through a war. And indeed, up until the beginning of this war, Israel was one of the world’s hottest investment destinations. In addition to Buffet, global stalwarts such as Johnson and Johnson, Intel, Ebay, Kodak, Cisco, Alcatel, Broadcom, Microsoft, BMC Software, Verifone and PMC Sierra all bought Israeli companies in the last year.

And the war certainly hasn’t affected Israeli ingenuity. Historically, times of war produce new cutting-edge technology, which, over the course of a few years, finds its way down to civilian applications. If you look around at the products you use on a daily basis, you will find embedded in them key Israeli intellectual property.

From voice mail to instant messaging to the firewall that sits on your computer, the technological revolution of the past decades is, and continues to be, powered by Israeli technology. None of this has changed as a result of the war. In fact, just last week Hewlett-Packard announced it was buying Mercury Interactive for $4.5 billion — the biggest Israeli deal ever — and this past Monday, SanDisk purchased another Israeli company, M-Systems, for $1.55 billion.

The investment firm CIBC wrote to investors that Israeli companies trading in New York were already trading at historically low multiples, even before the events in Lebanon began. As it is, almost all of the American-traded Israeli stocks do most of their business outside Israel, and are not being impacted by the war. And after their recent fall, they have become even cheaper — making for an even more compelling long-term investment.

Aaron Katsman, a former head of Citibank’s private banking division in Israel, is a managing director and lead portfolio manager at America Israel Investment Associates.



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