If you go back and trace the ups and downs 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 pound the war drums, but invariably they bounce back.
History has shown that the trading direction of 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 than the instability in the region.
As tech stocks moved back into favor this past year and the Israeli economy posted solid growth rates, shares of Israeli stocks also 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 from March 2009 to April 2010. Until recently, EIS more or less traded in tandem with other markets, pulling back to around $50 as worldwide markets moved lower.
But this time around, don't assume EIS will continue to track the Nasdaq, at least any time soon.
The recent events in Israel have not been dismissed as the Middle East's version of 'business as usual.' Europe, not Israel's geographical neighbors, represents the largest market for the country's agriculture and technology exports. Israel's heavy-handed response to Turkish and European efforts to deliver ai to the Gaza strip have incited so much anger across Europe that consumers and businesses may start to reconsider their purchase of Israeli exports. Tourism, a key source of Israel's economy, may also suffer due to these events.
It's hard to understate the importance of exports for the Israeli economy. The small country, with limited access to natural resources, relies heavily 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 locally-focused companies such as wireless service provider Cellcom (Nasdaq: CEL) could take a real hit if the Israeli economy slumps, forcing its citizens to tighten their belts.
We all hope that the current crisis brings renewed opportunity. Peace efforts have gone nowhere in recent years, stemming in part from a global lack urgency. This current crisis is likely to draw much more attention from leaders in Europe, Canada and Australia, and their engagement may bring about a push to move the peace process forward.
If Israel can eventually achieve some sort of peace with its neighbors, its impressive base of technology could find a place in more countries as boycotts are withdrawn. That seems like a long shot, but hope springs eternal.
I believe that as the ramifications of the current crisis become clearer, shares could fall considerably. If you have heavy exposure to Israeli stocks such as Teva or Cellcom, you may want to hedge your exposure by shorting the iShares MSCI Israel ETF.
EIS was listed #1 in our recent article asking you to Watch Out for These 10 ETFs With High Political Risk. To read about the other nine, click here.
