Barclays Capital came out predicting a quick end to the shallow Israeli recession, and a return to decent growth of 2.9%  by next year.  Keep in mind that the Israeli economy was late to the ‘recession game’ and looks to be an early ‘exiter’ from economic turmoil as well.

With all this great news Barclays said that they expect an Israeli Shekel/USD exchange rate of 3.65 buy the end of the year. That’s a big move from the 3.93 area that the currency is trading at now.

According to Globes: “Barclays sees a less severe recession in Israel, and relatively quick growth recovery. The investment house bases its optimism on the fact that about 75% of Israeli exports are high-tech goods, and Barclays says that a rise in the Tech-Pulse Index - showing a US high-tech recovery - points to stronger Israeli exports. The Tech-Pulse Index, measured by the San Francisco branch of the US Federal Reserve, tracks the US information technology sector.”

It looks like we have started to see this happen. As Tech has led the stock market turnaround in the US, Israeli stocks that trade in the US have been flying, up over 33% this year. Keep in mind that, like it or no, President Obama’s push for alternative energy sources will be huge for Israel, as Israel is one of the big global players in cleantech and water technology. If this trend of a ‘tech led recovery’ continues, look for the Israeli hi-tech scene, from small and mid-cap tech plays on the NASDAQ to M&A to Israeli VC, to have a very strong 2nd half of ‘09, and lights out for 2010.

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Despite a sharp drop in overall Israeli exports, Israeli hi-tech exports actually surged in the December-Feb. ‘09 period.

According to Globes: “High-tech exports, 52% of all industrial exports excluding diamonds, rose by an annualized 21% in December-February, after falling by an annualized 8.1% in September-November. Exports of mixed high-tech goods, 25% of total industrial exports, fell by an annualized 44% in December-February, after falling by an annualized 37.1% in September-November. Chemicals exports fell by an annualized 30% in December-February.The collapse of Israel’s diamond industry worsened further. Exports of rough and polished diamonds amounted to $800 million in January-February, in original figures, 65% less than the $2.3 billion in exports in the corresponding months of 2008. Imports of rough and polished diamonds amounted to $346 million in January-February, 76% less than the $1.48 billion in exports in the corresponding months of last year.”

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I clearly remember Israeli industrialists begging for the Bank of Israel to intervene in forex markets in order to pick up exports. We were told that a strong shekel caused a loss of over $2 billion in lost business, because Israeli goods were more expensive abroad. Industrialists got their wish and there was central bank intervention and not only that but the USD made a big move against most major currencies. Sounds like great news for exporters, right?

Wrong. Globes is reporting that Israeli exports actually fell in October, the first drop in 5 years. ” exports of goods (excluding diamonds) of 3.4% and an annualized increase in imports of goods of 2.8% in August-October 2008, the Central Bureau of Statistics reported today. This is the first drop in exports in five years, although there have been slowdowns in the rate of growth.”

If i am not mistaken, the Shekel has been strengthening over the last 5 years. That would mean that the industrialists have it backwards. Wouldn’t be the first time. I think( I remember hearing this but don’t quote me) former president Ronald Reagan once said something like ” a strong currency is the sign of a strong country and strong economy.”

Maybe the industrialists should concentrate on making better products at cheaper prices. I bet if they can compete on quality and price, then their sales will increase regardless of currency fluctuations.

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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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