How long can Israeli investors keep dodging the bullets?

The Israeli market has proved surprisingly resilient to recent hostilities. And with economic growth at its fastest for six years, Israeli stocks are looking like a good buy.

The Israeli market has proved surprisingly resilient to recent hostilities, with the Tel-Aviv 25 index down by just 4% since mid-July, compared with the 3% drop for emerging markets in general. Investors are betting that the fastest Israeli economic growth in six years GDP is expected to expand by 5.3% this year will give stocks a lift, says David Rosenberg in the International Herald Tribune. Growth has been helped by a narrowing budget deficit and interest rates at record lows. According to Jonathan Asante of First State Investments, "it's a good time to buy".

But movements in the Israeli stockmarket may reflect more than investors' assessment of the fundamentals: The Economist cites a recent study, which noted that between 2000 and 2004, the Tel Aviv 25 index dropped by an average 1.1% in response to an attempted assassination of a political leader, but rose by 0.6% if Israel killed an important militant. This reflects the fact that eliminating leaders in the military wing of an organisation is productive, since they recruit terrorists and plan attacks, while killing political or community leaders provokes a backlash and future violence. So the markets' slide after hostilities began may partially reflect the current targeting of Palestinian political leaders.

And what if the fighting in Lebanon spreads further? Investors seem to be hoping that the conflict will be short. So far it has had scant impact on the economy, but as Yaron Fridman of Bank Hapoalim points out, if reserve troops are called up, workers will have to leave their jobs for the army, denting overall growth. Meanwhile, Israeli stocks are still trading at a premium to the MSCI emerging market index. That makes them looks vulnerable in any case, not only to further possible rate hikes in the US which draw money away from risky assets but also to the nascent US slowdown, thanks to developing nations' enduring dependence on exports, as Stephen Roach of Morgan Stanley notes. All in all, it's perhaps not such a good time to buy.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up