Views On Investment - Itzhak Shrem

Standard & Poor's interviewed three of Israel's business leaders: Benjamin (Benny) Gaon, CEO of Koor Industries, Dan Propper, CEO of Osem Group and Itzhak Shrem, CEO of Dovrat Shrem. Their views on investment opportunities in Israel are presented here.

What is the long-range outlook for the market in Israel?

"I feel that the Israeli capital market will be good for the next 2-3 years. The risk of investing in Israel is probably lower than the risk of investing in western countries. The reason is that in the last three years when all markets in the West were soaring to sometimes ridiculous multiples of earnings, the Israeli market was down. There were two reasons.

"The first was the persistence of the Bank of Israel in raising interest rates to fight inflation. Nominal short-term rates jumped from about 9% to around 18% impacting the bond market and long-term savings. Everybody tried to go out virtually at the same time and took the market down much more than was reasonable under the circumstances. Israel is a growing market, but still a small market. We have all the rules that exist in Western countries, but higher volatility. So when the market moves either up or down, its movements are usually exaggerated.

"So now, we are the only country in the western world with a downtrend in interest rates. All the other markets are facing the problem of higher interest rates. In Israel, the question is when and how much interest rates will come down, not whether they will go down. Nobody dreams that interest rates will go up.

"Secondly, we're experiencing a soft landing and most of the good signs that the stock market in the United States had in the last two years. Investors started to realize in December 1996 that the market was unreasonably low and that has accounted for its strong performance to date, but with substantial room to climb further.

"There are several other reasons too for a positive outlook:

"Israel gives global investors a nice combination of an emerging market based on microeconomic figures, but with sophisticated reporting and accounting principles as in the United States. I think that we are much better than Europe in that respect.

"Every brokerage firm now has a full research department, a rarity just a few years ago. This has come about in response to the interest of international investors who now make up half, or maybe even more, of the volume today.

"I don't think that there is a real danger of war. When we analyze the peace process, we see many problems. Yet, I don't think that the existence of Israel, economically and politically, is pressured like it was ten years ago, for example. I don't know how long it will take to achieve peace, but I'm sure that we will get there.

"I think that the smart investor knows how to eliminate the external surroundings of the capital market in Israel. Recently we were in the middle of two heavy crises, which would normally mean that the market would react badly, and still the market was going up. That shows you that the market is really stronger than people realize."

Is the small float of many companies a restricting factor to foreign investors?

"Not if you take the first 50 to 100 companies. Some companies are capitalized at about $1 billion and some at $100-200 million with generally large floats. For those who like to do a very easy buy and sell, these are the companies that they should be focused on. If you want to put $50 million into one company, you can't do that, but you can easily spread $10 million among several companies."

What are the advantages of buying TASE-traded stocks as opposed to Nasdaq-traded Israeli stocks?

"Nasdaq-traded Israeli firms are mostly high-tech which trade at generally high prices with all the attendant risks. Shares on the TASE are more reasonably priced. In the past there was a discount for political factors built into the share prices of US-traded Israeli stocks, but this no longer exists for high-technology firms."

In what areas are the best values in Israel?

"In technology. There is no doubt Israel is becoming a high-tech country. One-third of the exports are from high-tech. Like Japan we lack raw materials, but have the skill to work, to make things with our minds. It seems like almost every day there is another fund starting for high-tech investment. It is amazing that the first IPO of any significant size after the crash in Nasdaq was Check Point. We came from Israel to save Nasdaq."

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