Israel: Investable Island In Chaotic Seas

April 14, 2015

With all the upheaval in the Middle East in the past few years, it’s tempting to think the entire region is about to go up in smoke. But don’t count Israel among them—at least not from an investment perspective.

Yes, geopolitical analysts like Robert Kaplan are counseling investors not to hold their breaths in terms of waiting for things to cool down in places like Syria and Iraq, Libya and even Egypt. Truth be told, the list of countries to worry about is a lot longer than those four. You’d be remiss not to throw Israel and Iran onto that list, and probably even Turkey, which finds itself on the edge of so much of the upheaval.

Just listen to those who oppose the whole idea behind nuclear disarmament negotiations with Iran. Deal or no deal, the nuclearized Middle East they say awaits humanity will pose an existential threat not only to Israel, but also to the rest of the Middle East. Even Europe could face nuclear danger, and the world’s policeman, the U.S., will be called on to sweep up the mess.

Troubling possibities, to be sure.

Israel Thriving

But here’s the curious thing: Israel—a country that finds itself in the middle of so much the tension in the region—is somehow thriving in all the uncertainty, leveraging a high-tech economy and its close tie-in with the broader global economy. Just look the chart below that traces returns in the past year for a number of Middle Eastern-focused ETFs.

Chart courtesy of StockCharts.com

The Market Vectors Israel ETF (ISRA | C-26) and the iShares MSCI Israel Capped ETF (EIS | C-56)—in green and black, respectively—are the only funds in the lot that have made investors money. ISRA is a bit more diversified, including non-Israel-based Israeli companies, and limiting the position of any one constiuent to no more than 12.5 percent. Those factors go a long way in explaining ISRA’s outperformance.

And remember, these returns came over precisely the period when ISIS (Islamic State in Iraq and Syria) has surged with the takeover of big cities like Mosul in Iraq, and at a time when oil prices have cratered by more than half due to rising U.S. production and flagging demand from Europe and China.

Meanwhile, the Market Vectors Egypt ETF (EGPT | F-57) and the iShares MSCI Turkey ETF (TUR | B-100) are each about 10 percent lower in the past year, and the iShares MSCI UAE Capped ETF (UAE | F-84) rounds out the losers of the past 12 months with a decline of more than 20 percent.

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