Your investments: Invest in the ‘Start-Up Nation’

Open a newspaper almost anywhere in the world over the last few months and chances are some article about Israel will either be on the front page or page 2.

By AARON KATSMAN
Investment graph (photo credit: INGIMAGE / ASAP)
Investment graph
(photo credit: INGIMAGE / ASAP)
Open a newspaper almost anywhere in the world over the last few months and chances are some article about Israel will either be on the front page or page 2. Be it updates on the Israeli election or Prime Minister Benjamin Netanyahu’s global crusade and open disagreement with US President Barack Obama over the Iranian nuclear deal, it’s pretty incredible that a country with 8 million people is able to garner such international attention. And that is just on the geopolitical side of the coin. Open the business or science section and once again Israel will appear over and over, as a result of some new cutting edge innovation or that another Israeli company has been purchased or has gone public.
While much of the developed world is mired in economic quicksand, desperately trying to escape the global recession, but with anemic growth, Israel keeps chugging along. Growth estimates for 2015 are north of 3 percent. Unlike the US where the unemployment rate has dropped because of people falling out of the workforce, Israel has seen its unemployment rate drop to under 6% with a workforce that continues to expand. How many Western economies can say that? The very successful book Start-Up Nation: The Story of Israel’s Economic Miracle certainly made the case for why the country has flourished, against all odds, economically. I can’t tell you how many emails and phone calls I have received from people who have read the book and are now all revved up to invest.
The question I hear the most is, “How can I invest in Israel?”
Stay local? For many investors, investing in local Israeli stocks is one alternative way of gaining exposure to the Israeli economy. If you want exposure to the strong domestic growth you could buy, for example, a local food company like Strauss or phone company like Bezeq. In order to do so you need to open up a local Israeli brokerage account, invest in shekels and speak in Hebrew to a local adviser. While this may be fine for some investors, for native English speakers this is a big step. Due to new IRS PFIC (Passive Foreign Investment Company) rules, many traditional investments like local Israeli mutual funds and ETFs have essentially become off-limits due to exorbitant potential tax exposure.
Keep in mind that while the economy is strong there is a big world out there with many countries boasting both solid economic fundamentals and growth. A tour through Asia or Latin America emerging markets will find many countries with 3%, or more, growth. Local food companies and telecommunication companies are a dime a dozen.
In addition not all in Israel is so rosy. Multiple tax hikes on corporations and individuals have been a huge drag on growth. The local real estate market appears to be showing “bubble” like symptoms, and more government intervention will only exacerbate the problems.
Go global? The real growth story is the ingenuity and creativity exported by Israel. Those excited after reading Start-up Nation weren’t running to invest in a small company that invests in locally canned food. Rather they want to be part of all the ingenuity and creativity that Israel exports. Investors want to invest in companies that power the world. It’s no secret that the largest multinational companies in the world are ever active in Israel. Whether it be Google, Johnson and Johnson, IBM or Facebook or any of a multitude of other well know companies, they all come to acquire or invest in today’s cutting edge technologies. From companies that can put a camera in a pill to help alleviate the need for invasive gastrological procedures (Given Imaging), to companies that lead the world in computer security (Checkpoint) to companies that are leading the move into cyber security (Cyberark). What Israel does very well is power the world based on technology and that’s what becomes exciting as an investment.
The easiest way to access these companies is via the Israeli stocks that trade in the US. As has been widely reported, Israel has more companies trading on major American exchanges than any other country in the world ex-China. Not all Israeli companies are created equal and investors should do in depth research before investing. As some of these companies are not very large, the smallest piece of news can send their stocks either soaring or tumbling. It’s therefore important to speak with your investment adviser to see how, if at all, investing in up-and-coming Israeli companies fits into your overall investment portfolio.
Hag sameach.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
aaron@lighthousecapital.co.il Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing, and is a licensed financial professional both in the United States and Israel.