Israeli peace process pays dividends: Christine Stopp looks at the practicalities of investing in a land of milk and money

An investor who put dollars 100 into the Israeli market at the beginning of 1987 would have had a holding worth dollars 575 at the end of September.

The stock market in Tel Aviv has existed since 1934 and has American-style regulation. Its equity capitalisation of dollars 40bn and dollars 32bn in bonds make it larger than several Latin American markets rolled into one. It is the only stock market in the world to have same-day settlement. The degree of computerisation that makes this possible also allows Israelis to get a free, instant portfolio statement in any branch of any bank using their Mastercard.

Technology is one mainstay of the Israeli stock market's success. There are more Israeli than British companies quoted in New York, many of them involved in some of the world's most advanced technologies.

A feature of the Israeli economy is the availability of a large, skilled workforce, enhanced in recent years by immigrants from the former Soviet bloc.

With the developing rapprochement in the Middle East, Israel hopes to reap a 'peace dividend' by welcoming in a flood of foreign investment capital. Institutional investors Like Arnab Banerji, chief investment officer at Foreign & Colonial Enterprises, are being wooed for a portion of the money they manage. Mr Banerji says he has been thinking about Israel for some time now and describes himself as 'a guarded bull'. If the political settlement 'evolves in the way I think it will, the market will be very exciting indeed', he says.

In the short term, however, he feels there is not much growth to be expected since the market has had an amazing run over the past two years (up 65 per cent in 1992; up 25 per cent to date in 1993).

Douglas Poulunin of emerging funds manager Pictet is also cool about Israeli prospects. His fund has reduced its Israeli exposure recently, not so much through worries about the market as to take advantage of better opportunities elsewhere. As a true emerging markets investor he finds countries like Jordan, Turkey and Syria 'just as interesting' and thinks a Middle Eastern fund would be of more interest to private investors than one investing only in Israel.

David Lesser is joint managing director of a Jerusalem brokerage that specialises in introducing overseas investors to the Israeli market. He disagrees with Mr Banerji's view about the market's short-term prospects, pointing out that price/earnings ratios typically of 20 to 25 seem alarmingly high to watchers from mature, West European economies, but are not so unusual viewed in the context of 4-6 per cent annual dollar GNP growth. He underlines the significance of Israel's future prospects: 'If the peace momentum continues, the market is undervalued. Israel will be the warrant on the rest of the Middle East.'

Asked to quote some of the market's interesting prospects, Mr Lesser mentioned the banks which, having been taken over by the government after the banking crisis of 1982, are now being re-privatised. Of the big banks he particularly likes Bank Leumi and Bank Hapoalim. He also likes two technology companies, Citex and Geoteck, both of which are quoted in New York.

How can the UK private investor buy into the Israeli market? This is, of course, a speculative area of investment that should be used for only a small percentage of capital, and only after taking professional advice. That said, there are no technical obstacles to investing in Israel, though the practicalities might not be so straightforward.

Overseas nationals can invest freely in Israel and repatriate gains without penalty provided they are bringing foreign exchange into the economy. Anyone can set up an account there through a London-based branch of one of the big Israeli banks. The account is held in Israel (a feature of same-day settlement is that you have to have the money ready and waiting before you invest) and there will be dealing and custodian costs.

You can do the same thing through an Israeli broker. David Lesser's company, Israel & Overseas, will set up accounts for individuals and can negotiate reduced charges for those with dollars 50,000 to dollars 100,000 or more.

For smaller investors, David Lesser recommends a fund. There are 250 Israeli mutual funds, but many are highly specialised, and advice is essential. Easier for the European investor is the only Israeli open-ended fund, a Zurich- based fund called Svecia Israel Selection Fund.

Insurance group Skandia has this fund as a link on the whole of its product range, from pounds 25 a month savings policies to pensions and single-premium bonds with a pounds 5,000 minimum. However, it would be much cheaper to bypass the insurance charges by investing in the fund direct. It has a minimum investment of dollars 10,000 or pounds 5,000, a 1.5 per cent annual management charge and a quarterly performance- related fee. Details of the fund are published in the Financial Times.

Investors wanting to buy Israeli shares without setting up a domestic account can buy US-quoted shares through a UK stockbroker. Another interesting possibility suggested by David Lesser is to buy a call option on the MAOF Index through an Israeli broker. The index comprises the market's top 25 shares and about 60 per cent of its capitalisation. By this method, 'even the private investor can get quite decent exposure to the heavies,' says Mr Lesser.

Contact: Israel & Overseas Investments 1934 Ltd Tel: 010 972 2 233 212. Fax: 010 972 2 231 742.

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