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
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 (
, 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 (
) 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
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
Disclosure: David Sterman does not own shares of any security
mentioned in this article.
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