Investors bet on windfall gains for Israeli tech, defense under Trump

In Israel, hopes are high for stronger commercial and strategic ties with the United States, and that warmer political relations will encourage foreign investors.

By REUTERS
Updated: FEBRUARY 28, 2017 11:23
Investors bet on Israel tech stock windfall under Trump (credit: REUTERS)
Investors are betting heavily that Israeli defense and cyber-security firms will reap a windfall from President Donald Trump's big US spending plans, although likely benefits for the wider economy remain like the man himself - hard to predict.
Israeli technology companies are likewise well placed to pick up contracts on other planned presidential projects, such as a hugely expensive wall along the US border with Mexico.
Economists, however, have yet to factor any positive "Trump effect" into their Israeli growth forecasts and analysts say some of his ideas, such as moving the US embassy to Jerusalem, could backfire with negative security and economic consequences.
After a month in office, some of Trump's Twitter commentary has caused bewilderment in a number of foreign capitals. But in Israel, hopes are high for stronger commercial and strategic ties with the United States, and that warmer political relations will encourage foreign investors.
Companies tipped to gain include defense contractor Elbit Systems, Magal Security Systems and Check Point Software Technologies. All have seen their share prices soar since Trump's election victory on Nov. 8.
Those, and many other Israeli companies, either have US subsidiaries or are incorporated in the United States - a useful hedge should Trump stick to his "America first" promise of giving priority to domestic industry.
Prime Minister Benjamin Netanyahu met Trump in Washington earlier this month, building on expectations of a friendlier relationship with the Republican president after a fractious eight years dealing with Democrat Barack Obama.
"Clearly, if spending goes up for cyber security or for border security or for defense, this is going to probably help Israel's tech industry. Israel is strong in all of these areas," said Jon Medved, CEO of equity crowdfunding firm OurCrowd.
"Israel is also very very good obviously in anything having to do with border defense and border security to the extent that becomes an important issue in the US and it seems like it will, those companies will benefit. And in general, homeland security getting a more anti-terrorist focus will be good for Israel," he added.
Steven Schoenfeld, founder of BlueStar Indexes, which develops indexes and exchange traded-funds that track Israeli stocks, said that perceptions matter and that investors would notice.
BlueStar's Israeli technology ETF has gained 13 percent on the US Nasdaq market since the election. So far, the effect on the wider market has been less remarkable. While Tel Aviv's broad index is up 6.1 percent, it has underperformed the MSCI World index for developed countries, which has risen about 8 percent in the same period.
The United States is Israel's largest trading partner by country, with bilateral commerce valued at $25.7 billion last year. Of this, more than two-thirds were Israeli exports, giving the country a large surplus.
One stock that has already seen a big surge is Magal, whose sensors and command and control systems help to secure airports, borders, power plants, seaports and prisons.
Investors expect it to provide technology for the Mexican border wall, a contract that could reap vast rewards given that the project is expected to cost around $20 billion.
With Magal's shares up nearly 60 percent since the election, Chief Executive Saar Koursh is optimistic of winning work on the wall. "Our chances are more than good," he told Reuters, noting that the company, through its US unit Senstar, was in touch with US government officials. "This definitely would be a large scale project for us."
Trump has also promised to boost defense spending and add military personnel. If he follows through, this could benefit Elbit, one of the biggest suppliers of drones and helmet based systems. Elbit shares are up 20 percent since November.
Before he took office, Trump questioned the high cost of Lockheed Martin Corp's F-35 fighter, saying he had asked Boeing Co to offer a price for a "comparable F-18 Super Hornet".
Such commentary caused ructions in the United States, but the Israeli company is ready to equip the pilots whatever. Schoenfeld said that whether Trump sticks with the F-35 jet or goes with the F-18, either plane will have Elbit smart helmets.
Israel's defense industry, led by Elbit, Israel Aerospace Industries, Israel Military Industries and Rafael, accounts for about 14 percent of the country's exports.
The Trump administration is expected within weeks to send Congress a request for a supplemental bill to increase defense spending this year.
Ilanit Sherf, an analyst at the Psagot brokerage, said Elbit could expand its annual revenue by 5-6 percent, instead of the current 2-4 percent, if the US defense budget increases following government spending cuts under Obama.
Cyber-security firms like Check Point may also see higher US orders. Former New York City Mayor Rudy Giuliani, Trump's cyber adviser, visited Israel last month and met Netanyahu to discuss closer cyber cooperation.
Israel has over 450 cyber-security firms. In 2016, 78 start-ups raised more than $660 million from investors, according to the Israel Venture Capital Research Center.
"Israel and the United States that are two leading powers, the United States obviously the leading power in the battle for cyber security, Israel I would say right up there. I think it's critical that we augment whatever each of us is doing alone by our cooperation both on the government to government level and what we can do with our cyber security industries," Israeli Prime Minister Benjamin Netanyahu said in Israel's cyber-tech conference last month.
Companies such as Nice Systems and Verint, whose voice and data analysis technology is critical to security, may also see a boost.
Much rests on whether Trump's spending plans go ahead and their wider effect in the United States.
Given Trump's unpredictability, economists have so far held back on including any boost in their forecasts. The International Monetary Fund sees Israeli growth steady at around 3 percent a year for the medium term.
Medved warned that if Israel is seen as too supportive of Trump, it could backfire in the tech community, which is unhappy with some of his policies, particularly on curbing immigration.
Should the United States become more protectionist, Israeli exports, which comprise 30 percent of economic activity, might suffer. This could be especially so were Trump to try to use the exchange rate to favor US firms over foreign competitors.
Risks could also lie in any attempt by Trump to side too closely with Israel. He had pledged to move the US embassy from Tel Aviv to Jerusalem, Israel's self-proclaimed capital and a holy city at the heart of the Israeli-Palestinian conflict.