Less Risk Means More Foreign Cash Driving Stocks: Israel Markets

The prospect of peace agreements in the Middle East is drawing money to Israel.

Foreign investment in the country’s stocks increased to the highest since 2009 last year, while the cost of insuring debt with credit-default swaps declined 24 percent. World powers struck deals with Syria and Iran designed to ease the threat of chemical and nuclear warfare, and the U.S. stepped up its push to make peace between Israelis and Palestinians.

The shift in sentiment means the money coming into Israeli companies is the most since before the wave of revolutions gripped the Arab world. While car bombs explode in neighboring Lebanon and civil war drags on in Syria, improving Israeli finances with a narrowing budget deficit and declining debt may keep that trend going this year.

“Israel’s lower risk premium is having a positive impact,” said Modi Shafrir, chief strategist at Mizrahi Tefahot Bank Ltd. (MZTF) “The main risks are a change in the geopolitical situation of the region, a sharp selloff in the global financial markets and an increase in the budget deficit.”

Net non-resident purchases of shares traded in Tel Aviv in January through November 2013 increased to about $1.4 billion from $413 million for all of 2012, according to Bank of Israel data published Jan. 5. That’s still 20 percent below the 2009 level, the year before the country’s re-classification to developed market status at index provider MSCI Inc. The budget deficit fell to 3.15 percent of gross domestic product, the lowest since 2007, from 3.9 percent a year earlier.

Soaring Index

The benchmark Tel Aviv 25 Index rose 12 percent in 2013, the best performance since 2010, driven by companies including wireless operator Cellcom Israel Ltd. and holding company Delek Group Ltd. The index has advanced 1 percent this year. Five-year credit default swaps fell to 89 basis points on Jan. 17 compared with an average of 141 basis points during the same period a year earlier.

“If you were to look just at economic parameters, the CDS would be lower,” said Rafi Gozlan, chief economist at Tel Aviv-based I.B.I. Israel Brokerage. “But of course, you can’t ignore the geopolitical situation. If the geopolitical situation really improves, the CDS will go down further.”

Direct Investment

Foreign direct investment in the first three quarters of last year, including mergers and acquisitions, rose to $10.5 billion last year, up from $9.6 billion during the same period in 2012. Initial public offerings in technology companies raised $361 million, the highest since 2007.

Among companies outside the TA-25 benefiting is budget supermarket chain Rami Levi Chain (RMLI) Stores Hashikma Marketing 2006 Ltd., which has lured investors such as computer billionaire Michael Dell’s MSD Capital LP and Boston-based Fidelity Investments. Its shares have risen 52 percent over the past year.

“Foreign investors understand the opportunity,” company founder Rami Levy said in an interview last month.

Rising foreign investment in Israel comes even as pro-Palestinian activists intensify a campaign to promote boycotts, disinvestments and sanctions directed at Israeli institutions and companies, especially those connected to Jewish settlements in the West Bank.

Boycott Campaign

The campaign has scored some successes, particularly in Europe. Dutch asset manager PGGM, which oversees more than 150 billion euros ($203 billion), said this month it would no longer invest in Israel’s top five banks because of “their involvement in financing Israeli settlements.”

Israeli Finance Minister Yair Lapid said last month that the failure of peace negotiations could lead to sanctions that “would likely be extremely destructive to the economic welfare of each and very Israeli citizen.”

Economic analysts are less concerned, saying while they could adversely affect some individual companies, the overall economic impact will be minimal.

“While the sanctions get a lot of publicity, they’re not a macroeconomic story,” said Jonathan Katz, a Jerusalem-based economist at HSBC Holdings Plc. (HSBA) “The foreign purchase of Israeli equities, bonds, private-sector buyouts, with huge funds flowing in, that’s the real story now.”

To contact the reporters on this story: Calev Ben-David in Jerusalem at cbendavid@bloomberg.net; Gwen Ackerman in Jerusalem at gackerman@bloomberg.net

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net; Riad Hamade at rhamade@bloomberg.net

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