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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Global Investing: Investing in Israel Part I

With gigantic growth of ETFs over the past several years, investors now have access to markets which in the past were unavailable. Emerging markets are a big craze among investors and in particular the BRICs( Brazil Russia India China). There are numerous ETFs compromised heavily or exclusively of the BRICs.

One country that is routinely ignored but provides a very attractive growth investment is Israel. There are now two ways to buy a basket of Israeli companies: the Ishares Israel ETF symbol EIS, and ISL a close ended fund titled First Israel Fund. Before I discuss which of these two is the appropriate investment choice, I must address why invest in Israel? Israel is constantly highlighted in the media as a dangerous place, however this is a misconception and despite the occasional violence the economy has been growing rapidly. I want to present a brief case to the skeptical investor why an investor should get exposure to the Israeli equity market.

Israel is currently classified as an emerging market; however MSCI announced that Israel will be classified a developed country starting in May 2010. Israel offers the stability of a developed country while the growth opportunities of an emerging country. In my opinion these two traits can not be found in any other country.

In addition to having the stability of a developed country, I believe Israel actually has many advantages over many developed Western countries and is therefore a more attractive country to invest in. Many European countries have a declining population growth which will lead to increasing pension burdens and medical costs which will be a severe handicap on future economic growth. Israel has a healthy annual growth rate of 1.8%. This growth rate is due to the total fertility rate which averages 2.9 children per woman in Israel, and steady immigration.

Many current immigrants are highly educated and contribute to economic growth in far greater percentage than native born Israelis. A commission recently estimated overall positive financial impact from American Immigrants since 2002 has contributed to over $250 million in the country's wealth. The commission also reported that three quarters of these immigrants come with at least a bachelors degree and with a medium net worth of $180,000 comes with.

Israel also has the advantage of having Stanley Fischer a brilliant economist serving as governor of the Bank Of Israel. Bloomberg recently ran a story on Fischer which stated that many of today’s top economists including Lawrence Summers and Ben Bernanke were his former students. The article stated “Many central bankers value him as a thinker about central banking, about monetary and financial policy,” says Nobel Memorial Prize-winning economist and MIT professor emeritus Robert Solow, one of Fischer’s own mentors. Fischer was vital in lessening the impact of the world wide recession on the Israeli economy.Fischer lowered interest rates on Oct 7, 2007 one day before the US and Europe acted in similar fashion. On August 25 he raised interest rates, which resulted in Israel becoming the first country in the West to raise interest rates. It seems that he is always a step ahead of his western colleagues in his actions.

Israel has another advantage in its banks being among the least effected by the current crisis. Its banks are among the healthiest in the world and had very little exposure to subprime lending and there was no need for a government rescue plan. Israel’s housing market has grown in the past two quarters faster than anywhere in the world. This is in contrast to countries all over the world which had to spend massive amounts of money to stabilize their banking system and prop up their housing markets.

Many European countries including UK, Germany, Belgium and many others had to give significant assistance their banks in order to avert a financial collapse. These problems were not limited to America or Europe, even Kazakhstan had to inject significant sums of money to several of its leading banks which were adversely affected by the global credit crunch. Despite this assistance many of these banks across the world are still threatened by bad loans that many financial institutions in worldwide. This is not the case in Israel which has a stable banking sector which allows for robust growth in the future.

Finally before getting into specifics as to the ideal way to invest in Israel, I must discuss challenges facing the country. Despite occasional violence Israel is a relatively safe place. After Israel launched Operation Defensive Shield in 2003 to crush terror cells in the West Bank there have been very few suicide bombings. However despite the decrease in terrorism, Israel is constantly being threatended by enemies. Israel has adapted to this reality by become one of the world leaders in military technogy.

Military technology is not the only area where Israel excels, technology for a wide variety of products are Israeli made. Israel has more companies on the nsadaq(besides the US) than China, India, Japan and all of Europe combined. This figure is not per capita, it is total, Israel a country of 7.1 million people has more companies listed on the Nasdaq than China which has a population of over 1.3 billion people. The lack of adequate water has resulted in Israel becoming a leader in drip irrigation and more recently in water desalinization. Israel is a remarkable country that takes advantage of its problems by producing innovative technology to overcome these disadvantages.

With investing in Israel you are getting the growth of an emerging market while getting the stability of a developed nation. Every international investor should consider investing in Israel.

I will discuss the valuation aspects of investing in Israel in Part II.

About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

Visit Jacob Wolinsky's Website

Rating: 4.8/5 (20 votes)


Rnagarajan - 7 years ago    Report SPAM
Good article. The new book "Startup Nation" is next on my reading list. Israel does indeed seem like a country offering attractive investment opportunities, albeit in a dangerous part of the world. Apparently Warren Buffett was comfortable enough with the region's stability to buy Iscar - a positive sign.
Yswolinsky - 7 years ago    Report SPAM
Thanks Ravi

I have read the book. I was slightly disappointed but I think that was mainly due to the fact that I knew a lot of the information he discussed in the book. I spent several years studying in Israel and have close family there. But if you are not farmiliar with the country the book is great.

Thanks for the compliments. You are one of my favorite bloggers on the web so coming from you it is a huge compliment.


Superguru - 7 years ago    Report SPAM
looking forward to your 2nd article on investing in Israel. Can you also provide insight on which Isreal ADRs and ETFs in US are, in your opinion, safe and cheap?

1.8% GDP growth rate does not sound very impressive compared to that of India or China.

Investing in an area so torn with war and terrorism with no peace in sight seems somewhat risky. I personally have no knowledge of that area, its problems or its history so only speak from what I see in news.
Yswolinsky - 7 years ago    Report SPAM
Thanks Super guru

I am waiting for ISL to give me more information on their close ended fund's P/E and other information before I post part II. ISL was taken over by _Aberdeen Asset Management PLC and they have they are in the process of updating the data. Any data you see on the fund in regards to valuation on yahoo finance or google finance etc is false. I wrote part I several months ago and was going to wait to get the data and write part i and II together, but I grew impatient and decided to post part I because I do not know when the data will finally be released.

the 1.8% growth was talking about population growth which is a very healthy percentage. This is in contrast to almost every other developed nation which have very negative demographic factors weighing on their economy. GDP growth has been far higher. In 2007 real GDP was 5.37 and in 2008 4.15 in Israel- this is probably one of the highest if not the highest rates among developed countries.

The region is risky but it has been that way for over 60 years and Israel has become one of the most advanced economies in the world. There has been a dramatic decrease in terrorism after Israel launched operation defensive shield 7 years ago in the west bank and routed out the terror cells. However, the prospect of war is still looming. But on a day to day basis you are much more likely to die in a car accident in Israel then a terrorism attack.
Yswolinsky - 7 years ago    Report SPAM

S&P affirms Israel's A rating, outlook stable

Fri Mar 12, 2010 11:43am EST

S&P also said the deterioration was cyclical and that economic reforms will continue to be implemented.

S&P has a stable outlook on Israel and assigned an A rating to its newly issued 2020 1.5 billion euro sovereign bond.

"We believe that the global recession hurt Israel's export performance in 2009. Nevertheless, Israel runs structural current account surpluses, and The Bank of Israel (BoI) increased its foreign exchange reserves to more than $60 billion at year-end 2009 from $43 billion a year earlier," S&P said in a statement.

more from reuters _http://www.reuters.com/article/idUSN1214120020100312

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