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Published: June 1, 2010
If you go back and trace the ups and down
of the Israeli stock market, you’ll find almost no correlation
with the broader conflicts taking place in the region. Shares on
the Tel Aviv stock exchange slump when Hamas or Hezbollah pounds
the war drums, but invariably bounce back. History has shown
that the trading direction from Israeli companies is more
closely tied to the performance of the Nasdaq (thanks to that
country’s large concentration of tech companies), and the
broader health of the Israeli economy.
As tech stocks have moved back into favor during the past year,
and the Israeli economy posts solid growth rates and little
inflation, share prices have posted significant gains. The
iShares MSCI Israel ETF (NYSE: EIS), which owns a basket
of Israeli stocks that trade on the Tel Aviv stock exchange,
doubled to $60 during the period from March 2009 to April 2010.
More recently, the
exchange-traded fund (ETF) has pulled back to around $50, in
tandem with other markets. But this time around, investors
shouldn’t assume that there'll be another rebound when the
Nasdaq rises anew.
That’s because recent events in Israel can’t be dismissed as
“more of the same.” Although the country does little business
with its Middle Eastern neighbors, Europe represents a massive
market for the country’s agriculture and technology exports. The
reaction to this weekend’s events off of the Gaza strip have
incited so much anger across Europe that consumers and
businesses may start to throttle back Israeli imports. Tourism,
which is also a key source of foreign earnings, may suffer in
the coming year due to these events.
It’s hard to understate the importance of Israeli exports. The
small country, which has a limited amount of natural resources,
heavily relies on imports to meet its transportation,
construction and power generation needs. If Israel’s exports
slump and tourism recedes, the country would be faced with
rising trade deficits, which would likely lead to inflation. And
inflation has been one of the key factors holding back Israeli
stocks in the past.
Israeli companies such as Teva
Pharmaceuticals (Nasdaq: TEVA) should emerge relatively
unscathed as the large majority of its sales are derived in the
United States. But domestic-focused companies such as wireless
service provider Cellcom (Nasdaq: CEL) could take a real
hit if the Israeli economy slumps and its citizens need to
tighten their belts.
The current crisis could also bring opportunity. Peace efforts
have gone nowhere in recent years, in part due to a lack of
perceived urgency. This current crisis is likely to draw much
more attention from leaders in Europe, Canada and Australia.
Their engagement may bring about a push to calm the current
crisis while moving the peace process forward. And if Israel can
eventually achieve some sort of peace, its impressive base of
technology could find a place in more countries, as boycotts
recede. That seems like a long shot, but hope springs eternal.
Action to Take --> Israeli
stocks are falling Tuesday for the fourth straight session. As
the ramifications of the current crisis become clearer, shares
could fall by a further considerable amount. If you have
exposure to Israeli stocks such as Teva or Cellcom, you may want
to
hedge that exposure by shorting the iShares MSCI Israel ETF.
-- David Sterman
Contributor
StreetAuthority |
