Is Israel Immune From the Global Market Turmoil?

Is Israel Immune From the Global Market Turmoil?

Paula Joffe Summer 2008
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It is said that when the United States economy sneezes, the rest of the world catches a cold. If that’s the case, then Israel must be on steroids. Indeed, Israel’s financial markets and economy have grown even as recession jitters spooked world markets. There is reason to believe that this robust growth will continue, making investment in Israel a possible hedge against the recent global market turmoil.

A Financial “Aliyah”

It is said that immigrating to Israel is akin to elevating oneself. This is why it is called aliyah, or “going up,” in Hebrew. This past April, international ratings agency Moody’s Investor Service (MIS) gave Israel a financial “aliyah” when it upgraded Israel’s bond ratings to A1 from A2. The organization said this was done to reflect the country’s “proven resiliency in the face of repeated economic and political shocks, its firmly established fiscal discipline, and its ongoing financial and political support from the United States and the Jewish Diaspora.” Moreover, MIS cited Israel’s competitive edge in high-tech products, deep capital markets, and advanced institutional capacity, all of which suggest that Israel has graduated from its classification as an “emerging market economy.”

Also in April, at an Israeli cabinet meeting, Bank of Israel Governor Stanley Fischer forecasted that the NIS (New Israeli Shekel) would continue to strengthen against the dollar in the medium- and long-term future. He further said the economy was in line for continued growth in 2008, albeit at a slower pace than in previous years—around 3.2 percent—but that the growth would likely be higher than that of the United States and Western Europe.

Shiboleth, Yisraeli, Roberts, Zisman & Co., a global corporate law firm that provides business consulting, also confirms this. According to their estimation, the economic uncertainty experienced in the United States in the last quarters of 2007 has had only a limited impact in Israel.

Attracting Investors

One only needs to look at the players involved in Israel to understand the depth of opportunity there. World famous investor Warren Buffett chose Israeli company Iscar Metalworking for his first international investment. Charlie Munger, Buffett’s partner at Berkshire Hathaway, called Iscar “one of the world’s greatest companies.” Munger added that he and Buffett were, “sending an indirect message to the world for foreign investors to make similar investments.”

Buffett and Munger did not need to encourage other companies to invest in Israel. Intel, the computer chip giant, had already beaten them to the punch. Indeed, Israel’s Intel R&D center takes credit for the development of Pentium chips.

Often referred to as “Silicon Wadi,” research and development at Israel’s universities and high-tech centers are yielding breakthrough technologies. From start-up companies to major corporations, their development projects are adding to the breadth of life science, telecommunication, pharmaceutical, and computer technology advances. For private and professional investors who would like to participate in an exciting market, Israel offers myriad technologies and frameworks.

Notably, individual U.S. investors can participate in Israel’s economy by purchasing shares in an index fund comprised of Israel’s top 35 capitalized companies. The AMIDEX family of funds, which includes the AMIDEX35, was designed to include Israeli companies that trade on the Tel Aviv Stock Exchange (TASE) as well as those trading in New York.

According to AMIDEX founder Cliff Goldstein, people invest in Israel through AMIDEX not only because they like the idea of what Israel has to offer, but also because they want to achieve a level of diversity and returns that the fund offers. “What’s interesting, for example,” he says, “is that the big name banks in the United States are either losing a lot of money or are flat. Leumi, Poalim, IDB—the Israeli banks—continue to make money and support 5 percent GDP growth.”

Start-Ups

It’s no longer a secret that Israel is one of the world’s most important resources for industrial research and development and high-technology innovation. So impressive are the statistics regarding the number of start- up firms and the volume of ingenious products manufactured there, Israel now rivals the United States as a destination for venture capital. Some 80 venture capital firms are now operating in Israel, representing nearly $10 billion in assets and investments in more than 1,000 Israeli start-up companies.

As a sign of their place in the global technological market, Israeli firms will remain excellent acquisition candidates. This is due, in part, to the fact that the government encourages innovation. The BIRD (Bi-National Industrial Research & Development) Foundation, for example, is a U.S.-Israel endowment fund that grants dollars to R&D joint ventures. The Israeli government shares in the development risk, since the loan is only repaid if the project is successfully commercialized.

Among other important projects, Israel is taking the lead in investing in clean tech companies and venture funds. For example, the government is backing a private initiative to establish a network of electric car “refueling” stations to support a new generation of battery-operated vehicles. For a country without any indigenous energy sources, the plan will create a green transportation opportunity. When fully implemented, the country will be dotted with 500,000 charging stations where drivers will recharge their vehicles or swap out the car batteries. This should generate a host of new jobs in construction, maintenance, and R&D.

This kind of breakthrough technology, along with once-classified military technologies that were retooled and developed as profitable civilian applications, now accounts for nearly 70 percent of Israel’s exports—a big change from the agricultural base that Israel once relied upon. In fact, technology gains in exports outpace other sectors many times over, with the biggest advances seen in software and telecommunications. These two industries alone account for $5 billion in Israeli export sales.

As they become leaders of innovation in specific niche technologies, Israeli businesses are now fully integrating into the global economy. In fact, many Israeli high-tech firms have become so well established that they are viewed as competitors of the firms that eventually acquire them. It is now common to see almost one foreign acquisition per month in Israel, with virtually no loss of jobs. Frequently, the research and development teams stay in the country and continue to work for the new employer. The Israeli entrepreneurs, instead of just cashing out, move on to new high-tech endeavors with the hopes of creating another industrial mark.

In early 2008 alone, Microsoft completed its acquisition of Kidaro of Ramat Gan for close to $100 million. MSystems, the creator of the Flash Stick portable computer external drive, was purchased by California-based SanDisk Corporation for $1.5 billion. Johnson & Johnson gobbled up medical technology from the Israeli firm Colbar for $159 million. IBM just announced that it is setting up a new Systems and Technology Group Lab in Israel that will leverage the deep technology skills and creativity of the industry there. These are just a few recent deals. Other announcements are expected later this year.

Outlook

According to Yair Shiran, Israel’s economic minister to North America, venture capital money is pouring into Israel, fueling the rapid development of new technologies. American companies invested more that $6 billion in Israel in 2007 alone.

“After America, Israel is one of the most important centers for new technology,” says Shiran. This, coupled with significant government support, makes Israel an attractive repository of private and venture capital investment.

Israel is also an attractive country for individual and institutional investors. Israel now has 75 companies trading on the NASDAQ, worth a total of $60 billion. This is more than any other country, not including the United States and Canada. The New Israeli Shekel is now convertible on all international markets.

Although it would be difficult to predict if this economic growth will continue unabated and unaffected by global events, it is clear that Israel currently presents an attractive financial landscape for investors. As noted by Citibank analyst David Lubin, in the face of the U.S. slowdown, the Israeli economy is proving more resilient than expected. A country of only 7 million people—including a large non-Jewish Arab population—Israel has built a financial system based on strong human capital and thriving open markets. It’s not the land of milk and honey anymore, but a place to grow your dollars and shekels.

Paula Joffe, a former Executive Director of the America-Israel Chamber of Commerce, is president of JD Partners, LLC in New Jersey.

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