For Arie Nessim, head of the capital markets division at Israel's Bank Leumi, the sleepless nights began on July 15, when Scitex Corp., the jewel of Israel's high-tech industry, jolted investors by announcing that second-quarter earnings would be about one-third lower than expected. Scitex' stock, which trades only in New York, fell nearly $10, to 28 3/8. The bombshell triggered a sell-off of other Israeli stocks--in Tel Aviv as well as New York.
And if that wasn't enough to keep Nessim awake, his bank's new, highly promoted mutual fund, Psagot, or "a view to peace," was launched just days before Israeli forces clashed with guerrillas in southern Lebanon in some of the of the heaviest fighting on that front in more than a decade. "That's hardly an auspicious welcome for a peace-based fund," he says with a sigh. The fund raised 170 million shekels, or $60 million, to invest in companies that are expected to benefit from peace in the Middle East.
The developments at Scitex and along the Lebanese border are giving investors in Israeli securities a lot of bad nights. After all, markets don't rally forever, and the last couple of years have been one big bull run for the Israelis. The Mishtanim Index, a measure of stock prices, more than tripled, and in 1992 alone, the number of companies on the Tel Aviv Stock Exchange grew by 30% as annual dollar value of trading volume rose to $15 billion.
BOTTOM-FISHING. Nevertheless, the bull market isn't over. Indeed, some market analysts argue that this pullback should not have surprised anyone. "After two years of such phenomenal growth, a technical correction was bound to come," says Zeev Holtzman, director of Giza Ltd., a Tel Aviv investment bank.
Even before the slide, the Israeli market seemed to be losing its oomph. Prices stopped their hard-charging climb in early 1993 and remained little changed until recently. The U.S.-traded stocks have been hit even harder, since most are small over-the-counter issues that have suffered along with the rest of the technology stocks. Better-known names such as Elbit Ltd. and Lannet Data Communications Ltd. have been especially hurt: Like Scitex, they are trading barely above their 52-week lows (table).
But it was Scitex' forecast shortfall--blamed on poor sales growth in Europe and pricing pressures in the U.S.--that jarred investors most. Perhaps the highest-profile Israeli stock outside of the country, Scitex has made a lot of money for investors. The stock, which stood at less than 3 five years ago and near 40 on July 1, goes for 25 now.
U.S. analysts who follow the stock have slashed their earnings forecasts, but not all have turned bearish. Lior Bregman of Oppenheimer & Co., for example, cut his Scitex forecast by 20%. But Bregman still thinks the company, which makes state-of-the-art computerized imaging and printing equipment, will earn $2.65 a share in 1993 and $3 in 1994. If he's right, the stock is a steal.
Some big investors are already trying to bottom-fish Israeli stocks. A group led by PEC Israel Economic Corp., a U.S. holding company that invests in Israel, just bought 533,000 Scitex shares, raising its stake to 23.2%, or 9.89 million shares. Emilio Bassini, a managing director of BEA Associates, which manages the First Israel Fund, thinks the market slump is a great buying opportunity because stocks have been beaten up "unnecessarily." Bassini says that Israel's high-quality educational system, relatively low wages, and the influx of engineering talent from the former Soviet Union provide a competitive edge for high-tech companies in particular.
HELPING HAND. Of course, the slump in Tel Aviv also reflects a slowing in the Israeli economy--down this year to a 4% to 4.5% rate of gain from 1992's robust 6.6%. But on July 24, the Israeli government announced several measures that analysts believe will help the economy--and in turn, the stock market. One is a 2% devaluation of the shekel that should give a little boost to exports. Another set of measures, the elimination of two-tier currency exchange rates and the cancellation of import-tax surcharges, should promote more competition in the economy and help to keep prices--and inflation--in check. Last year, inflation was only 9.4%, the lowest level since 1968, and this year, the rate is about 10%. The government hopes to drive inflation below 8% in 1994.
The government's recent moves should also allow interest rates, now above 11%, to fall to near 10%. "Within a few weeks, interest rates are expected to come down, and this will no doubt have an extremely desirable impact on stocks," says Avi Harel, manager of Bank Hapoalim's Securities & Deposits Div. In fact, the Tel Aviv stock market started to move up the day after the announcement, but the rally was snuffed out by the news from Lebanon.
The tense military situation and fragile peace negotiations may make some investors skittish about buying Israeli stocks. But remember, this bull market got started when Saddam Hussein was lobbing Scud missiles, and gas masks were the required dress of the day.