Trader watches the stocks 311.
(photo credit: AP)
Geopolitical risk, especially increased tensions with Iran, could scare off
investors interested in Israeli companies, Citigroup Inc. said in a
report released Wednesday.
“Underlying economic fundamentals are strong
in Israel, especially relative to other developed markets, but we are concerned
by the geopolitical risk,” Citigroup analyst Michael Klahr was quoted as saying
in the report titled Assessing Geopolitical Risk and the Investment Case for
Israel. “There exists significant geopolitical risk due to an adversarial
relationship with the Palestinians, Hizbullah (in Lebanon) and perhaps more
worryingly with Iran.”
Citigroup cited the “ongoing conflict with the
Palestinians that at times has taken a military turn, most recently in the Gaza
offensive in late 2008, and there are the increasing tensions with Iran that
have risen markedly since President Ahmadinejad came to office in
Ongoing military conflict over the past 18 years has not impeded
Israel’s economic growth a great deal, the report said.
The economy grew
at an annual rate of 4.2 percent from 1980-2009 and maintained high fiscal
credibility and low sovereign risk, it said.
Real GDP growth in Israel
since 1960 has averaged 5.5% annually, well ahead of the global GDP rate of
“Non-existential geopolitical risk relates to the conflict with the
Palestinians and with Hizbullah (and the PLO before them) in Lebanon, and in our
view, does not constitute a threat to Israel’s existence,” Klahr said.
“Existential geopolitical risk, such as the 1967 wars with Egypt, Syria and
Jordan, and more recently, the threat of conflict with Iran, in our view, were,
and could be, a threat to the country’s existence.”
Growth in tourism
could have been significantly higher without the backdrop of military conflict
over the years and the ongoing struggle with the Palestinians, the report said.
Tourism accounts for less than 5% of GDP, far lower than Greece, Spain and
Portugal, despite good weather, beaches and an abundance of historical
Defense expenditures were 17% of total government spending in
2007, far higher than other OECD countries, the report said.
absence of military conflict, this is money that could be put to better economic
use, in the form of infrastructure, education and other higher return on
investment over the long term,” Klahr said. “Nevertheless, Israel’s overall
long-term economic record is undeniably a good one in a global
Leading Israeli stocks have averaged returns of 20% annually
since 1992, driven by strong GDP growth (4.2%) and declining inflation and
interest rates, the report said.
“Israeli equity returns over the past
two decades are in line with emerging markets such as Mexico and Hungary and
well ahead of developed markets such as the US (+7%), Spain and Portugal (+10%),
France (+6%), Germany (+5%), the UK (+4%) and Japan (-2%),” Klahr said.
“Difficult to see much evidence of the negative impact of political uncertainty
Citigroup said the Israeli market presented a compelling long-term
investment opportunity, but it advised caution in the near term.
case of Israel would suggest that under certain conditions, even repeated
military conflict over many years can have a relatively limited economic
impact,” Klahr said. “However, it is important to stress that the past isn’t
always a good guide to the future.
“If Iran really is an existential
threat to Israel and there is an outbreak of prolonged hostilities, then that is
bad news for the Israeli economy and asset prices, regardless of strong
underlying fundamentals and economic policy.”