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