Israel: An Often Overlooked Outperformer

September 01, 2015

Steven Schoenfeld is one of the index industry’s most knowledgeable figures. His classic tome, “Active Index Investing,” published in 2004, is a must-read for any die-hard indexing fan. Schoenfeld also started the firm Blue Star Index with the ambition of developing benchmarks that go well beyond Israel, canvassing the entire eastern Mediterranean. While that dream is predicated on hopes for peace in what is a dangerous neighborhood, it’s hard to deny that the payoff could be big for investors with an appetite for risk and an awareness of how successful Israel’s economy already is.

ETF.com: Why are Israeli stocks outperforming U.S. markets this year?

Steve Schoenfeld: Israel is a developed-market economy and a developed stock market by MSCI, FTSE, OECD standards. But it's physically located in a pretty rough neighborhood. And because of that, it's often overlooked by investors, both institutional and retail.

In addition, because of the chaos of the Middle East—historically—but especially since 2011 and the Arab Spring, Israel has been surrounded by turmoil. Whether it's changes of government in Egypt, the rise of ISIS or the collapse of Syria in civil war, Israel has constant threats on its border, whether it's Hezbollah or Hamas. When you think of political risk, Israel seems like a risky place.

However, the fact is that Israeli companies are world-class. Hundreds of Israeli companies are doing business all over the world, having very profitable and robust franchises, and innovative products. When you look at Israel as a market and as an investment, it's actually quite attractive.

If you look at the past five, 10, 15, even 25 years, despite all the challenges of Israel's geopolitical location, the Israeli stock market has performed well, and has produced absolute and relative returns that are very favorable for U.S.- and European-based investors.

The problem is the headline that Israel often feels risky. But investors need to dig in and look at the actual companies. If you look at the top 30 Israeli companies, these are leaders in almost every key sector—health care, information technology, telecom, consumer discretionary and consumer staples. There are also strong emerging technologies, whether it's cybersecurity, online ad tech, defense tech, agri tech. Look across the innovative sectors of the world and you find many Israeli companies.

Chart courtesy of StockCharts.com

ETF.com: That diversity obviously is helping economic and market performance.

Schoenfeld: Yes. When Hamas started a battle with Israel last summer, tourism, banks and hotels got hit, but Israel's export prowess wasn't hit at all. In fact, at the end of last summer, Israel had one of its most successful IPOs—Mobileye—which is the world's leader in autonomous driving. When you think about self-parking cars or eventually self-driving cars, it's an Israeli company that’s at the forefront.

In addition, all the world's tech leaders—like Google, Microsoft and Apple—have their biggest R&D centers outside of their home market in Israel. They tap into the innovative, entrepreneurial tech ecosystem that is Israel. The country has more venture capital per capita and more startups per capita than anywhere else in the world.

The Israeli market and economy is diversified. It's robust. And unfortunately because of the neighborhood that it's in, it's resilient. Israeli business has learned to deal with the inevitable ups and downs of the geopolitical situation. Israeli companies are known as reliable partners, even when there’s some tension in the region.

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