November 29, 2011
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What country went into the 2008-2009 recession in a stronger position and exited sooner than any western nation? Whose stock market has outperformed the MSCI EAFE over the past 10 years? You guessed it – Israel.
Israel’s developed economy is stable and growing, and its companies are thriving in a pro-business environment. As the portfolio manager of a mutual fund focusing on Israeli stocks, I’m confident these stocks are poised to advance when global economic confidence is restored.
Broader macro issues
The macro-economic environment in Israel today is strong, especially relative to the rest of the world. Interest rates are low, inflation is in check at around 3.0%, and unemployment is nearing pre-recession levels of around 5%. Israeli banks are conservatively capitalized and the lending culture is risk-averse with no sub-prime mortgages.
As a result of these fundamentals, Israel‘s position among developed economies is exceptionally strong. It incurred only two quarters of negative GDP growth during the 2008 recession, and it recovered sharply from the early-2009 bottom. Stanley Fischer, Governor of the Bank of Israel, predicts 4.7% GDP growth for Israel in 2011 and 3.2% growth in 2012.
Geopolitical environment
Even in the current geopolitical environment, the Israeli stock market could outperform other developed markets. Because of unrest in the Middle East earlier this year and concerns about European financial stability, the Israeli stock market has declined about 20% over the past 11 months. Israel’s GDP growth continues, however, largely thanks to the nature of its exports, which are focused in the technology, healthcare, and agriculture industries. Global geopolitics are unlikely to affect these sectors much.
In May 2010, Israel was upgraded from an emerging market to a developed market, in part because MSCI Barra no longer considers geopolitical risk relevant when determining a country’s eligibility for “developed” status. Warren Buffett had a realistic view of risk in Israel when he purchased an Israeli company, Iscar, saying: “We live in a dangerous world as it is, and in the long term the risk premium in Israel will not be different from the US’s.”
Over the long term, domestic economics and the situation in end markets are the key to stock market performance. The current market pullback is a good opportunity for the long-term investor to enter Israeli stocks.
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