Stocks, shekel and economy big winners in 2006 [p.17]

The mighty shekel was only deterred from a breathtaking advance after Fischer took a slice out of interest rates.

By LEAH GRANOF
At the end of last year, Israel's business and economic sectors cheered a remarkable year of growth and expansion - they should have saved some champagne for 2006. Israel, this year, saw increasing prosperity and some big firsts in the areas of foreign investments, mergers and continued growth rates that even had some analysts worried the economy might be growing too fast. Even the war in Lebanon, the year's potential economy wrecker caused the worst damage to the tourism industry and businesses in the North while leaving the rest of the economy mostly intact, much to the surprise of analysts who never predicted the speedy rebound from this summer's misfortune. During the peak season, tourism fell in August to one-third the levels it had witnessed during June and July. Although on track to reach record heights of over 2 million before the war, the year ended with just 1.8 million tourists visiting the country, short of last year's 1.9 million visitors. The rest of the economy, however, continued to offer promising results. Following the pattern set in 2005, the year started off with the largest first quarter growth rate seen in six years with a 6.6 percent rise in gross domestic product. Slowed only by the summer war, overall GDP growth is still predicted to meet pre-war expectations and hit 4.8% for the year. Setting the stage for such growth was an increase in consumer spending, buoyed by decreasing unemployment and an increase in exports. Unemployment dropped to 8.4%, from a first quarter start at 8.8%, translating into roughly 100,000 new jobs. Unemployment has continued to fall at a mostly steady rate since its peak of 10.9% in 2003. In line with global world trade, manufacturers' growth increased 8.4% according to the Central Bureau for Statistics, augmenting the number of exports Israel puts out to the world, largely in hi-tech with ever-increasing markets in South East Asia and the US. "[Former finance minister Binyamin] Netanyahu's reforms opened up the economy and the export figures show that we are continuing to be part of the global market," said Shlomo Maoz, chief economist with Excellence Nessuah. Validating the strong economic standing, Fitch Ratings Service near year-end raised its outlook on the country to "positive." "The positive outlook reflects the Israeli economy's increased dynamism and resilience following the reforms of recent years, demonstrated by the limited economic impact of the war in Lebanon and the strong rebound now under way," the firm said in its report. Foreign interest Meanwhile, foreign investments approached $20 billion as some of the largest mergers and acquisitions in Israel's history transpired during the year. An estimated 20 percent of that came from the man of the year, Warren Buffett, whose $4 billion buyout of Iscar Metalworking sent waves of euphoria throughout the country. "Iscar should be taken as an example for a model around the world," Buffett declared during his first visit to Israel in September. Buffett's jaw dropping investment might have inspired real-estate mogul Donald Trump who, never to be outdone, announced plans to erect Israel's tallest building in Ramat Gan soon afterwards. "I am a good businessman and I have tremendous confidence in the strength and potential of the Israeli economy," the billionaire asserted via videophone at the annual Globes Business Conference in Tel Aviv this month. In addition to these publicity attracting declarations, hi-tech also lived up to its hype this year with Hewlett Packard's purchase of Mercury Interactive for $4.5b. setting records as the biggest hi-tech buyout in history for an Israeli company. Immediately following HP's announcement, SanDisk Corp. revealed plans to buy Kfar Saba-based M-Systems Flash Disk Pioneers for $1.55b. "We not only produce hi-tech, but we set-up solid companies to sell later on," explained Excellence Nessuah's Maoz. Notably, investment in technology has nearly doubled since the last strong buildup six years ago. "The hype was very good for the economy then, and this is even better," said Jonathan Katz a macro-economist at HSBC. Not all of the year's thrilling deals involved the selling off of Israeli companies as local business also flexed its buying power with Check Point Software Technologies, the Ramat Gan producer of solutions to secure Internet-based networks against intruders, saying in November it was looking to buy Swedish-based Protect Data AB. The M&A highlight for an Israeli acquisition of a foreign company, however, goes to Teva Pharmaceuticals Industries Ltd., which this year closed its $9.9b. purchase of US drugmaker Ivax, making it the largest M&A ever to come out of Israel. "The Teva deal was of particular importance because it went in the other direction. It signified the growth of Israeli multi-nationals buying companies based outside of Israel," said Len Rosen, managing director and country head for Israel Lehman Brothers, which advised on the deal. Most deals, he noted, involve foreign multi-nationals buying up companies within Israel. Teva's troubles Not all news was good news for Teva, however, which substantially underperformed its peers on the TA-25 with its stock price falling around 32% on the year while the benchmark index as a whole rose nearly 14%, leaving Teva in the dust. "Until this year it was the darling of the market, but this year it was the dog," said Avi Weinreb, a trader with Clal Finance Batucha. Teva's woes began in January and were sealed by a fourth-quarter change of management announcement that left analysts gaping in astonishment. CEO Israel Makov, who had engineered the takeover of Ivax, announced that he would step down next year. His replacement would be Shlomo Yanai, head of Makhteshim Agan Industries. Yanai's perceived inexperience sent Teva's stock price plummeting as analysts wondered what was behind the move. "I don't know of any pharmaceutical company that hires someone with no basic skills," Ori Hershkovits, an analyst with the Sphera Fund in Tel Aviv, said at the time. Also finding itself in trouble was El AL Israel Airlines, which faced growing competition from foreign carriers who received permission to start flying Tel Aviv routes. The late summer drop in tourism along with soaring oil prices added to the airline's difficulties and left the company with large losses and plans to restructure. Bourse bounty Yet another testament to the country's resiliency in 2006 was the Tel Aviv Stock Exchange, which despite the war and Teva's struggles ended out the year around record highs. The benchmark TA-25 closed at an all-time peak of 948.83 on December 20, while the TA-100's highest finish of 948.77 came two days earlier on December 18. A Tel Aviv standout was Lev Leviev's Africa Israel, which soared with share prices nearly doubling due in large part to its assets and projects in Russia. And let's not forget Israel's three major banks, which contributed to the lofty levels as they benefited from the Bachar reforms, which forced banks to sell off their mutual and provident fund interests. In the wake of the sales, Bank Leumi, Israel's second largest bank, announced plans to pay out the country's single heftiest lump sum dividend ever with a NIS 2.5b. gift to its shareholders. Bank Hapoalim, Israel's largest bank, decided to divide its dividends into chunks, forgoing one large pay-out. Those bank profits may be in for a shock down the road, however, as the industry faces increasing pressure to do away with or cut some of the fees they charge customers. Shining shekel The shekel was also a star performer in 2006. Starting out the year around 4.4 against the US dollar, the currency peaked at a five-and-a-half year high of around 4.17 in mid-December taking advantage of weakness in the buck and Bank of Israel Governor Stanley Fischer's tight monetary policy and high interest rates. While Israelis were thrilled with their newfound buying power for foreign-made goods, the shekel advance worried local exporters and business and Fischer was pressured from many sides to cut rates to end the advance. But the governor had proceeded cautiously, making a series of 25 basis point cuts and had even said on December 11 that cuts would be gradual because any "drastic" reduction could cause inflation to overshoot the central bank's target. So it came as a big surprise just two weeks later when Fischer lopped a half-point off the rate to 4.5%. But it did the trick for the shekel, which immediately pulled back to around 4.2. With not a dull moment to be found in 2006, market participants are hoping for an equally exciting year in 2007.