Background

Israel is frequently mentioned in the press with reference to conflict and regional tensions.  While conflict is part of everyday reality in Israel, there exists another, perhaps more significant reality—remarkable economic growth built upon a shift away from socialism. Similar to many Eastern European countries, Israel started moving away from socialism in the late 1980s.  Unlike many Eastern European countries, however, Israel started with significant advantages.  The most important was a common law legal system combined with a small, but dynamic, private business sector operating as far back as the pre-state period (the State of Israel was established in 1948).

The Israeli legal system is built on a foundation of British common law inherited from the colonial mandate period.  Over the years this system functioned extraordinarily well, particularly relative to other former European colonies which gained their independence in the 1950s and 1960s.  In this regard Israel is similar to the smaller, more economically successful, former British colonies of Hong Kong and Singapore.  By utilizing established legal concepts of secure property rights and enforceable contracts the Israeli private sector developed very modern institutions, despite the obstacles erected by the socialist oriented national governments of the 1950s, 1960s and 1970s.

One of Israel’s long-term success stories is the growth of its high technology sector.  High technology products now account for the majority of Israel’s industrial exports and a significant percentage of total exports.  Israel has more scientists and engineers per capita than any other country in the world.  This developing high tech sector is well represented among publicly-traded Israeli companies, and Israel now has more companies listed on U.S. stock markets than does any other foreign country.

This long-term strength, however, became a short-term liability when the technology sector collapsed in 2000.  The deep recession that followed spurred the Israeli government to broaden its reform efforts to include areas such as financial services liberalization, privatization of state owned companies, reducing entry barriers into a variety of domestic industries and improving the flexibility of the labor market.  While significant political impediments to the reform process remain, the economy is already accelerating in response to these improvements.

Israel Investment Advisors, LLC believes that the Israeli economy will continue to prosper even in a difficult security situation. While we hope for a peace dividend in the future, we believe future growth is more dependent on continued movement away from Israel’s socialist legacy than on the prospects for peace.

Israel Investment Advisors, LLC offers individuals, endowments and other institutional investors the opportunity to participate in the growth and development of the Israeli economy and financial markets.  We expect Israeli companies will increasingly tap the securities markets for capital allowing our portfolios to encompass a growing range of industries over time. While we believe that investment in Israeli companies can yield superior return opportunities over the long run, these opportunities come with increased economic, political and security risks. Please contact us to discuss if investing in the Israeli markets is right for your portfolio.