Israeli investors who dodged a global rout in technology stocks earlier this year are now bearing the brunt of a slowdown in the local economy as fighting in Gaza stretches into a seventh week.
Israel’s benchmark TA-25 Index lost 0.7 percent in the five days ended Aug. 21, paced by a tumble in shares of Strauss Group Ltd. after the supermarket chain reported a drop in second-quarter profit. In contrast, the Bloomberg Israel-US Equity index, which tracks companies listed in New York, rose 1.4 percent as Mobileye NV, which makes software to avoid car accidents, surged 13 percent. The TA-25 Index rose 0.8 percent to 1,383.73 today in Tel Aviv after policy makers unexpectedly cut interest rates.
There are more startups per capita in Israel than in any other country, yet the TA-25 has only one technology company among its members. That composition helped it outperform in March and April when a selloff in Internet and biotech stocks hit Israeli listings overseas on concern that valuations had become stretched. Now comes the reversal as local investor sentiment is souring amid slowing growth and the latest Gaza conflict while the Standard & Poor’s 500 Index, the benchmark for American equities, has soared to a record.
“In addition to the conflict, the economy is slowing,” Bruce Schoenfeld, research director at New York-based BlueStar Global Investors LLC, said in an Aug. 21 telephone interview. “On the flipside, most of the U.S.-listed companies are technology-oriented, which are seeing strong results. It’s a bifurcation in terms of companies focusing on the domestic economy and overseas markets.”
The Tel-Aviv gauge’s retreat last week was the biggest since July 10. Delek Drilling-LP, an oil and gas company, led the drop, falling 5.8 percent to a five-month low after posting an earnings decline for the second quarter. Strauss slumped 5.2 percent as profit slid 33 percent.
Israel’s economy decelerated even before the conflict escalated last month. Growth slowed to 1.7 percent in the second quarter, from a revised rate of 2.8 percent in the first three months of the year, the government said Aug. 17.
Exports tumbled 17.7 percent in the April-June period as a 14 percent rally in the shekel over the past two years has eroded the competitiveness of local producers. The currency fell 1.3 percent last week on concern policy makers may take steps to curb its strength to aid the economy that has been hurt by the war.
U.S.-traded Israeli stocks, which are mostly comprised of technology and pharmaceutical firms, shrugged off the disappointing economic data, rallying with American stocks on signs that growth in the world’s largest economy is picking up.
More than 2,100 Palestinians have died from Israeli fire since the conflict escalated in July, according to Gaza health officials. Sixty-eight have been killed on the Israeli side in the fighting, the most since the 2006 war with Lebanon’s Hezbollah militia.
“Security concerns continue to weigh on sentiment,” Steven Shein, a trader at Psagot Investment House Ltd. in Tel Aviv, said by phone yesterday. The TA-25 Index closed at the lowest level since July 10.
Evogene Ltd., which applies algorithms to plant biology to improve crop yields, soared 7 percent last week for the second-biggest gain in New York. Taro Pharmaceutical Industries Ltd. added 4.2 percent. The best performer, Mobileye, which relies on the U.S. for 62 percent of its sales, jumped to $37.59. The company raised $890 million on July 31 in the biggest initial public offering in the U.S. by an Israeli company.
SodaStream International Ltd., the maker of home soda machines whose biggest markets are in Americas and Western Europe, gained 4 percent, ending a two-week losing streak.
“Almost of all of Israeli stocks trading here are in the high-tech and health-care sectors and are more connected to the U.S. and the resurgence of tech spending here,” said Brian Friedman, who manages the Israeli Investment Fund at GHP Investment Advisors in Denver. “Sectors that are tied to the domestic demand in Israel are going to weaken for a quarter as the retail sector is taking a hit. When rockets are raining down on your society, it is difficult to shop.”
Local investors avoided getting burned by declines in U.S.- traded technology stocks in March and April, benefiting from gains in Israel’s energy and banking sectors. The TA-25 rose 2.1 percent in the two months, while the Bloomberg gauge for the U.S.-listed firms fell 2.2 percent.
As signs of an economic slowdown are mounting, companies such as Strauss and El Al Israel Airlines Ltd. are likely to be hurt by a drop in tourism and local consumption, BlueStar’s Schoenfeld said.
“The Israeli market has really started to weaken over the last week,” Schoenfeld said. “It tends to suggest domestic-oriented companies will be expecting soft results.”