This week Prime Minister Benjamin Netanyahu salvaged a coalition government in the Israeli Knesset, obviating the need for early elections.
With a new vote delayed until October of 2013, the pro-business administration of Netanyahu will be able to continue to foster a healthy business climate.
As a result of frequent turmoil in the region, coverage of Israel revolves primarily around political developments. From an investment perspective however, it’s important to evaluate the country and its leader based on macroeconomic fundamentals.
Netanyahu, both as finance minister and prime minister, has implemented a number of economic reforms that have liberalized the banking sector and the economy in general.
The nurturing climate towards business has catalyzed the development of a thriving tech sector, unique in the Middle East, which has produced world-renowned firms like Mellanox Technologies (MLNX, quote).
Although Netanyahu’s administration will certainly be business-friendly, that’s not reason enough to go long a basket of Israeli stocks as the country faces some macroeconomic headwinds. Like most countries in the emerging world, a prolonged recession in Europe, Israel’s largest export market, will pressure companies with significant international operations.
Moreover, Moody’s recently downgraded the outlook for Israeli banks to negative because of a considerable risk concentration problem; much of their exposure is confined to conglomerates that could suffer in the event of a global slowdown. A yawning budget deficit and a recent current accounts deficit from this export-heavy country are also cause for concern.
In terms of regional political concerns, investors should keep an eye on rhetoric towards Iran. While most experts on the area see little immediate evidence that Israel will invade Iran or vice versa, a change in the status quo would result in significant pressure on Israeli markets.
In sum, investors should hesitate going long EIS until the situation in Europe is settled; however, because of a hospitable business climate, individual names in sectors with bullish fundamentals are still viable.