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Israel Investment Advisors: Terrorism, Security Threats and Israeli Stock Market Volatility

Published on Oct 09 2014 // Columnists, Market

The tragic kidnapping and murder of three Israeli teens by Palestinian terrorists and the shocking
retaliatory kidnapping and murder of an Arab teen by Israeli extremists ignited the latest round of
violence in the Palestinian‐Israeli conflict. On June 12th Israel launched Operation Brother’s Keeper to
locate the kidnapped boys and, as Hamas responded with rocket fire from the Gaza Strip, Israel ordered
airstrikes against Hamas (Operation Protective Edge). This spate of violence comes in the wake of failed
peace negotiations in April.

Once again the central impediment to peace is whether Palestinians displaced by the 1948 War of
Independence and their descendants have a “right of return” to Israel. The Palestinian leadership
contends this right of return is sacrosanct and non‐negotiable while Israel argues that granting millions
of Palestinians residency and/or citizenship within Israel’s borders would transform Israel into a majority
Arab and Muslim country. Of course, this would destroy the very essence of Israel as a sovereign safe‐
haven for the Jewish people and risk potential ethnic cleansing of Jewish Israelis. One need only glance
at the sectarian violence among Arabs in Syria and Iraq to understand Israel’s legitimate concern. While
other impediments are also important including Palestinian disdain for Israeli settlement policies in the
West Bank and the permanent status of Jerusalem, only the “right of return” issue entraps Israelis and
Palestinians in permanent conflict.

While financial markets are often derided as irrational and short‐term oriented, in fact, they can often
prove startlingly wise in their forecasts. Rather than experiencing extreme volatility in reaction to each
new round of conflict, violence, provocation or military encounter the Israeli stock market tends to react
quite modestly to security related episodes and usually recovers rapidly. This is not because stock
market investors regard security issues as unimportant. Rather investors most likely regard security
threats as a permanent variable in the Israeli financial equation. As such, Israeli stocks tend to trade at
valuation discounts relative to the United States…Read More>>

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