January, 2012–During the three-month period ending December 31, 2011, the benchmark Tel Aviv 100 Index rose 2.58% and for the full year 2011, it declined 20.06%. Most worldwide markets, including Israel, rose during the fourth quarter as plans to contain the European debt crisis emerged. For the year, Israel’sstock market performance was roughly in line with other European stock markets which were down, on average, more than ten percent.
Despite 2011’s market returns, the macro-economic environment in Israel today is strong, especially compared to the rest of the world. Israeli banks are conservatively capitalized and the lending culture is risk-averse with no sub-prime mortgages. In addition to the strong banking system, the Israeli government enjoys a nearly balanced budget, with a small deficit. Interest rates are low at 2.75% and forecasted by the Bank of Israel (BOI) to be 2.25% by year-end 2012. Inflation is at 2.5%, with a BOI estimate for 2.1% by the end of 2012. Unemployment, which was 5.4% in 2011, is expected to rise to approximately 6.4% by the end of the year.
As a result of these strong fundamentals, Israel’s GDP grew 4.8% in 2011, slightly beating its 4.5% GDP growth rate of 2010. This is largely due to the nature of its high-value, high-tech exports which are primarily in the areas of technology, healthcare, and agriculture. Due to the debt crisis in Europe, there is the expectation of a slowdown in domestic and export demand. Europe accounts for 40% of Israeli exports and Israel depends on Europe for many imports. Therefore, the BOI’s GDP growth forecast for 2012 is 2.8%, down from a previous estimate of 3.2%.
Outlook and Opportunities
In our opinion, Israeli stocks appear attractive despite the risks associated with the potential unraveling of the European economic union along with the potential for regional conflicts. The average stock in the Tel Aviv 100 Index sells for less than thirteen times earnings, which seems attractive given the potential for earnings growth and the recovery underway in numerous world economies.
Another great opportunity for growth is the enormous regional gas discoveries and Noble Energy, along with its Israeli partners, continues in its efforts to explore and develop the Eastern Mediterranean’s energy deposits. Following the development of the tremendous Leviathan gas field off the coast of Israel, the company recently announced a 5-8 tcf (trillion cubic feet) discovery of natural gas off the coast of Cyprus. Regional leaders and Noble have discussed the possibility of linking these gas fields and exporting Israeli and Cypriot gas via pipeline to Europe. These plans would offer significant benefit to Israel. Apart from the tremendous revenue opportunities, the plan would bring Israel economically closer to Europe and possibly allow the country to establish a sovereign wealth fund similar to Norway’s to provide for the well-being of its citizens. The transformation of Israel from a coal and oil-based economy to a natural gas one is likely to lead to tremendous infrastructure projects which should boost economic growth.
Finally, the country’s continued focus on high value-added information and medical technology products should keep the economy well-positioned for future growth. It should be noted that many of these companies are exporters with their business done out of the country, significantly reducing geopolitical risk.
On balance, we believe the positives outweigh the potential negatives. The strength of the economy, the inexpensive stocks, and the value-added exports in demand by the global economy should provide compelling returns in the coming years.
Jamia C. Jasper, Founder and Portfolio Manager
AmerIsrael Capital Management, LLC
207 East 83rd St., Suite 3|New York, NY 10028 |Tel: (212) 327-1345| www.AISHX.com, firstname.lastname@example.org
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