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The very successful book Start-Up Nation: The Story of Israel’s Economic Miracle (New York, 2009) certainly made the case for why Israel has flourished, against all odds, economically. I can’t tell you how many emails and phone calls I have received from people who have read the book and are now all revved up to invest in Israel. They all want to know how they can invest in Israel.

Before looking at various investment alternatives, I think that it’s important to make a distinction vis-à-vis investing in Israel. I would like to distinguish between the Israeli economy and Israeli ingenuity. The story of the Israeli economy is well documented. The country survived the recent financial crisis with flying colors. With the U.S. reporting an unemployment rate over 9% (the real jobless rate is closer to 15-16%), the situation in the holy land is much better. Unemployment around 5.7% and dropping, GDP is growing at a 4.7% clip (est.) for 2011, and a strong currency all are major factors in the strong economy.

Compared to the global economic scene, things in Israel are great, but there are some clouds on the horizon. The Bank of Israel recently ratcheted down Israel growth numbers for 2012, to 3.2% because of the continued global slowdown. The local real estate market appears to be cooling and while it has taken a back seat, no one knows exactly how the large ‘tent protests’ will impact the economy.

How to Capitalize?

For many investors, investing in local Israeli stocks is one alternative way of gaining exposure to the Israeli economy. If you want exposure to Israel's strong domestic growth, for example, you could buy a local food company like Strauss Group (OTC:SGLJF) or a phone company like Bezeq (OTCPK:BZQIF). These happen to be traded in U.S. markets, but in general, in order to invest locally, you need to open up a local Israeli brokerage account, invest in Shekels and speak in Hebrew to a local advisor. While this may be fine for some investors, for many native English speakers in Israel and abroad this is a big step.

It’s also important to note that, while strong, Israel’s economy is not the only investment destination in the world with similar strong economic fundamentals. A tour through emerging markets (Brazil, Chile, South Korea etc.) will find many countries with 4+% growth. Local food companies and telecommunication companies are a dime a dozen.

To me that’s not the reason people get excited about investing in Israel. Those excited after reading Start-up Nation weren’t running to invest in a small company that invests in canned Israeli food. Rather they want to be part of all the ingenuity and creativity that Israel exports. Investors want to invest in companies that power the world. It’s no secret that the largest multi-national companies in the world are very active in Israel. Whether it be Microsoft (NASDAQ:MSFT) or Johnson & Johnson (NYSE:JNJ) or IBM (NYSE:IBM) or any of a multitude of other well known companies, they all come to Israel to acquire or invest in today’s cutting edge technologies. From companies that can put a camera in a pill to help alleviate the need for invasive gastroenterological procedures (Given Imaging (GIVN)), to companies that lead the world in computer security (Checkpoint (NASDAQ:CHKP)) to companies that are leading the move into cloud computing (Radware (NASDAQ:RDWR)), what Israel does very well is power the world based on technology. And that’s what becomes exciting as an investment.

The easiest way to access these companies is via the Israeli stocks that trade in the U.S. As has been widely reported, Israel has more companies trading on major U.S. exchanges than any other country in the world. Not all Israeli companies are created equal and investors should do in depth research before investing.

Risk

It’s very important to note that these types of investments carry an element of risk. As some of these companies are not very large, the smallest piece of news can send their stocks either soaring or tumbling. It’s therefore important to speak with your investment adviser to see how, if at all, investing in up-and-coming Israeli companies fits into your overall investment portfolio.

Source: Investing In Israel's Domestic Growth Or Ingenuity?