Investing in Israel: A Primer
Written by: Aaron Katsman | June 1, 2008
Aaron Katsman
IsraelNewsletter.com
A few weeks ago, Zack Miller and myself were interviewed by CNBC’s Squawk Box. The purpose of the interview was to discuss Israel’s accomplishments over the past 60 years. During the interview, we focused on Israeli companies that are publicly traded in the United States, as well as up-and-coming technologies that could potentially make a global impact over the next two to four years.
Investment Destination
Over the last four years, Israel has become a very popular destination for foreign investors. Global giants like General Electric, Microsoft, IBM and Johnson and Johnson are only a few of the companies that have made large investments in Israel by buying local companies. In fact, Warren Buffet, perhaps the world’s most famous and successful investor, made his largest non-U.S. investment when he purchased Iscar, an Israeli company, for $4.4 billion. Buffett has since referred to the purchase as a “dream investment.”
Background
Why are foreign investors so interested in Israel? While Israel has none of the popular natural resources (such as oil or precious metals) that other emerging countries have, it boasts another, extremely important commodity - people. Its skilled workforce - which is highly motivated, resourceful and independent - enables Israel to stay ahead of the competition. The Israeli workforce has more engineers and scientists per capita than any other country in the world, and it enjoys the highest per-population ratio of university degrees and academic publications.
Israel’s workforce is particularly competitive due to its exceptional ingenuity and entrepreneurial spirit. It has the world’s highest density of high-tech startups (4,000 in a country of 6 million people). The combination of culture, skill and initiative creates a flexible working system that allows for great adaptability while producing breakthrough technologies and quick time-to-market solutions.
Military
Unfortunately, Israel is located amongst nations that aren’t particularly friendly. As a result, so much money has poured into defending the country that over time many cutting-edge defense technologies have developed civilian applications.
For example, many products that are used worldwide on a daily basis contain key Israeli intellectual property. From voice mail to generic drugs, to your cellular telephone and the firewall that sits on your computer, the technological revolution of the past decades is, and continues to be, powered by Israeli technology.
How to Capitalize
There are two main ways to invest in the Israeli economy. The first is to work with a local Israeli bank and start investing in stocks, bonds, and mutual funds that focus on the local Tel-Aviv stock exchange. This gives the investor exposure to Israel’s strong economic growth (3.2%) and one of the world’s best performing stock markets over the past three years (don’t forget, past performance is now guarantee of future returns). However, it’s important to note that the local stock market is not where Israel’s creativity and ingenuity lie. In fact, most of the creativity that Israel exports to the world is not actually represented on the local Tel Aviv stock exchange. Most of the companies that trade there are local banks, telecommunications companies, etc. Therefore, investing in such a way gives the investor more exposure to the local Israeli economy.
On the other hand, anyone looking to invest in the Israeli companies that are known worldwide for their ingenuity and creativity should buy shares in Israeli enterprises that trade abroad, most notably in the United States. In fact, companies that are busy developing life-changing technologies tend to be smaller-sized firms that are not yet on anyone’s radar screen. Israel has more companies trading on major U.S. exchanges than any other country in the world.
Risk
It’s very important to note that these types of investments carry an element of risk. As some of these companies are not very large, the smallest piece of news can send their stocks either soaring or tumbling. It’s therefore important to speak with your investment adviser to see how, if at all, investing in up-and-coming Israeli companies fits into your overall investment portfolio.
Disclosure: Author’s fund has no position in any stock mentioned as of 6/1/08.
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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
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