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Published: November 23, 2009
Emerging markets have been the success story of 2009.
While more developed economies such as the United States and
Europe have struggled to recover, countries like Brazil, Russia,
India and China are on a roll.
Another emerging economy is also rocketing.
Morgan Stanley Capital International has upgraded this market,
and it will make the coveted leap to "developed" market status
in May of 2010.
It's Israel. This tiny nation on the Mediterranean Sea might not
be the first place that comes to mind when investors think about
international diversification, but it should be at the top of
the list.
The Tel Aviv 100, a benchmark of Israel's 100 largest stocks, is
up +69% this year.
Israel's currency, the shekel, has gained
ground against the dollar.
Investors may be reluctant about
shouldering political and geographic risk. Israel is surrounded
by enemies and has been plagued by the constant threat of
violence. Yet that has been true since its founding in 1947, and
Israel has nevertheless developed into one of the world's most
innovative economies.
Israel's workforce is among the most educated and is renowned
for its entrepreneurial spirit. The country has one of the
highest numbers of patents filed in the world and is crawling
with start-up companies. The World Bank notes it consistently
ranks near the top in per capita research and development
spending.
After years of GDP growth at about +5.0%, Israel's economy --
along with the rest of the world -- experienced a mild recession
last year. Now, it's rebounding: GDP grew +2.2% in the third
quarter of this year and should grow by +2.9% next year,
according to a Barclays Capital forecast.
The downturn in Israel was brief enough to make the Bank of
Israel the first major central bank to raise short-term
borrowing rates, a sign of strength signaling confidence in the
economy. The central bank has held the rate steady the past two
months, but could announce another rate hike by the end of the
year.
Part of Israel's success can be attributed to its status as the
Silicon Valley of the Middle East. Tech has been the best
performing sector in the market this year, gaining more than
+55% compared with the S&P's +23%. About 75% of Israel's exports
are technology products, so it should be a prime beneficiary if
this trend continues.
Two funds offer the best broad exposure to Israel: iShares
MSCI Israel Capped Investable Market (NYSE: EIS), an
exchange-traded fund, and First Israel Fund (AMEX: ISL),
a closed-end fund.
Each of these funds offers broad exposure to the Israeli market,
with both funds holding many of the same securities.
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EIS is a bit top-heavy: Its top five holdings comprise more
than 50% of the portfolio. ISL is more balanced: Its top five
holdings make up 33% of the holdings. The fund trades at a -7%
discount to net asset value, meaning investors get a dollar of
assets for 93 cents. Considering that the TA-25 Index is trading
at 34 times earnings and the TA-100 Index at 44 times earnings,
cost-conscious investors may want to pick up ISL.
Brad Briggs
Staff Writer
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