Israel in 2008: Bulls vs. Bears

by: Eze Vidra

The Israeli market received a great deal of media coverage in 2007. Some journalists lamented on the momentum and promise of the Israeli start up world; some sell-side analysts “shorted” the strength of the economy for a myriad of factors. Regardless of where you stand, its helpful to know who is saying what about the conclusion of 2007 in Israel and the potential reticent in 2008, the Year of the Rat.

What the Bulls are saying

S&P upgrades Israel’s debt outlook (Ha’aretz)

Standard & Poor’s raised Israel’s debt outlook from negative to stable. The S&P’s decision means good news for the Israeli business sector, as well as the state, making it easier to raise financing abroad and lowering its cost. According to S&P, Israel’s GDP is forecast to expand by an average of slightly under four percent annually for the next five years.

Miracle in the Holy Land (WSJ, requires subscription):

With the right policies, Mr. Netanyahu says, Israel could grow at an Irish-like 8% for a decade. But its experience already shows that strong human capital and an opening market are the best resources any country could ask for — a good lesson for the oil-rich Middle East.

Israel Tech and Venture Capital Review 2007 (Leap Capital)

According to the study performed by LEAP Capital, the year 2007 was solid solid year for Israel’s hi-tech sector (click image to enlarge).

On one hand there were:

  • No new financing records.
  • No jumbo IPOs
  • No multi-billion dollar M&A deals.

But on the other hand:

  • M&A: $6.15 billion in 48 M&A transactions
  • VC investing: $1.48 billion raised by 163 private tech companies
  • More than $1.65 billion of public market financings

What the Bears are saying

Merrill Lynch: Israel country analysis for 2008 (The Marker, Merrill Lynch)

In a pdf doc spanning over 107 pages, Merrill Lynch takes a deep look into the Israeli economy and makes recommendations for 2008. According to the report, “We kick off 2008 with a 52% “Buy ratio”, the lowest for five years (avg. 62%)”. That said, ML picks the 2008 play list, selecting the investment themes in the Israeli economy that will outperform in 2008: Basic Materials (Israel Chemicals (ISCHF.PK)), Consumers (Delek Automotive, Partner (NASDAQ:PTNR)), Deep Value (Discount (OTCPK:ISDCF)), Defensive (Teva (NYSE:TEVA)).

This is a very conservative outlook, that completely disregards the impact of Israeli tech.

Here’s how Merrill Lynch dissects the Israeli investment case matrix (click image to enlarge):

Israeli Tech Startups Raise $1.76 Billion in 2007 (Red Herring)

Despite raising $1.76 billion in 2007, a record sum for the past six years, the 2008 outlook for Israeli tech startups is not all rosy. A survey released last week by the Israel Venture Capital Research Center notes that “This year will be dependent on the economic situation in the U.S. due to the dependence of the local high-tech industry on investments by American investors”.

However, the survey also found the highest level of investment in seed companies since 2001. Seventy eight seed stage companies raised $151 million in 2007.

BDI: Many new businesses fail to survive (Jerusalem Post)

Business information company BDI-Coface released the results of its survey this week. According to the survey, around 48,500 businesses were launched in Israel last year, making up 11% of all businesses in the country. Despite these record numbers Israel suffers from one of the highest failure rates for new small and medium-sized businesses in international comparison, as only 58% of new ventures survived after two years and 30% after five years. (I recommend reading more… results vary for different industries)

Something to Think About: Free the Economy

The Heritage Foundation Index of Economic Freedom ranks Israel only in the 46th place of freest economies in the world. Israel is ranked 4th out of 17 countries in the Middle East/North Africa region, and its overall score is much higher than the regional average.

Israel is weak in two areas: government size and fiscal freedom. Government spending is high, constituting almost half of GDP. Income tax rates on individuals and corporations are also relatively high, as is total tax revenue. Although relatively advanced for the region, Israel’s financial sector is still subject to government intervention and control. If Israel could remove those hurdles, the potential for growth is higher than any of the estimates above.