Juergen Buettner

The country of Israel has developed into a small, but fine stronghold of high-tech. Israeli-owned companies in the sector have had a good run on the stock market for more than a year now. Quite rightly, as details prove.

While U.S. corporations dominate not only the world’s stock exchanges, but also the technology sector, other nations have made notable contributions in the tech sector as well.

The 10 most valuable companies in the world came from the United States at the end of last year, according to a survey by Ernst & Young. Five technology companies ranked in the top seven, including Apple, Alphabet, Microsoft, Amazon and Facebook.

Israel, meanwhile, despite its small geographical size, 8.5 million inhabitants and difficult geopolitical situation, has nevertheless succeeded in establishing a high-tech sector with a first-class reputation.

Strong entrepreneurial mentality and lively startup scene

Israel’s reputation in the sector is not generally known, however, because its industry representatives are more likely to act as suppliers rather than have direct contact with consumers. The country, which is less than 1/400th the size of the United States, developed the Intel processors, operating systems Windows NT and XP, the USB stick and the ICQ program. In addition, 12 Nobel Prize winners have Israeli roots.

Israel is second in the World Economic Forum’s ranking of the most innovative countries. Only Switzerland is regarded as more innovative. Further, Israel spends more on research and development as a share of its domestic resources than any other developed country – 4.25 percent of GDP, according to the OECD. That compares with 2.79 percent in the U.S. and 2.4 percent on average for OECD-countries.

The information and communication technology industry in Israel has a share of more than 20 percent in the value-added chain, the second highest share among all OECD members after South Korea. According to a study by the German External Economic Center in Bavaria, around 1,400 high-tech startups and 18 new venture capital funds were set up in Israel in 2015. In total, 70 venture capital funds hope to find the “next big thing” to invest in.

In addition, 320 international corporations have set up their research and development centers in Israel.

Popular takeover targets

Politics has also contributed to this success story. Responsible lawmakers created early institutional structures and business-friendly legislation, as well as support programs for innovative startups, the Bavarian Foreign Economic Center reports. As a result, Israel is also very successful in information and communication technology, medicine and pharmaceuticals, agro-technology, cybersecurity and the defense industry. The proximity to the military industry and to first-class research facilities has been a key advantage in Israel’s becoming a leader in technology.

Israeli technology companies are also well positioned due to the fact that they are popular takeover targets. Recently, Mobileye, camera technology specialists, and Advanced Vision Technologies, provider of optical online inspection systems for the print industry, had takeover offers from Intel and U.S. conglomerate Danaher.

According to consulting agency PwC Israel, the majority of the takeover activity in the past two years was related to information technology and business software companies. Cukierman Investment House expects the strong foreign investment in Israeli high tech to continue in 2017. Particularly lively activity is expected from Chinese companies whose interest is primarily in medical technology and modern water and agricultural technology, the Israeli investment company said.

TASE-BlueStar Israel Global Technology Index closes in on record high

Despite all the success, listed Israeli technology stocks have not always been fast-sellers in the past 13 years, as seen on the TASE-BlueStar Israel Global Technology Index, which contains 56 stocks with connection to Israel listed on the stock exchanges in Tel Aviv, London, Nasdaq and New York. Launched at the end of 2003 with 100 points, the index dropped to 62.47 points by Nov. 20, 2008. Subsequently, helped by the bull market on the world stock exchanges that started in March 2009, it rose to 220.35 points by July 22, 2015. Then there was a temporary setback to 155.59 points, but since Feb. 12, 2016, the index has been rising, nearly reaching the old high. A new record would be considered a pro-cyclical buy signal from a technical point of view.

It is also worth noting that, until now, listed Israeli tech companies were generally not included in leading stock indices. For example, the S&P Global 1200 Info Tech Index does not contain any such stock, and the Nasdaq 100 index has only one: cybersecurity firm Check Point Software Technologies.

A comparatively simple way to invest in this theme is provided by the BlueStar TA-BIGITech Israel Tech ETF (Ticker: ITEQ). As its name indicates, the Nasdaq-listed ITEQ ETF seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the aforementioned TASE-BlueStar Israel Global Technology Index. As of March 31, the ETF has achieved 19 percent gains during the past 12 months. But remember: Past performance is no guarantee of future returns. And although this investment idea sounds promising in theory, it is always advisable to hedge positions with a stop-loss order. Finally, unexpected negative developments cannot be completely ruled out.