Investors bet on Israel tech stock windfall under Trump
21/02/2017 13:36
* Cyber-security, defence sectors could benefit most
* U.S. is Israel's largest trading partner by country
* Magal Security shares surge 58 pct since U.S. election
* Giuliani met Netanyahu to forge cyber cooperation
* But economists yet to factor "Trump effect" into forecasts
By Steven Scheer and Tova Cohen
TEL AVIV, Feb 21 (Reuters) - Investors are betting heavily
that Israeli defence and cyber-security firms will reap a
windfall from President Donald Trump's big U.S. spending plans,
although likely benefits for the wider economy remain like the
man himself - hard to predict.
Israeli technology companies are likewise well placed to
pick up contracts on other planned presidential projects, such
as a hugely expensive wall along the U.S. border with Mexico.
Economists, however, have yet to factor any positive "Trump
effect" into their Israeli growth forecasts and analysts say
some of his ideas, such as moving the U.S. embassy to Jerusalem,
could backfire with negative security and economic consequences.
After a month in office, some of Trump's Twitter commentary
has caused bewilderment in a number of foreign capitals. But in
Israel, hopes are high for stronger commercial and strategic
ties with the United States, and that warmer political relations
will encourage foreign investors.
Companies tipped to gain include defence contractor Elbit
Systems ESLT.TA , Magal Security Systems MAGS.O and Check
Point Software Technologies CHKP.O . All have seen their share
prices soar since Trump's election victory on Nov. 8.
Those, and many other Israeli companies, either have U.S.
subsidiaries or are incorporated in the United States - a useful
hedge should Trump stick to his "America first" promise of
giving priority to domestic industry.
Israeli Prime Minister Benjamin Netanyahu met Trump in
Washington last week, building on expectations of a friendlier
relationship with the Republican president after a fractious
eight years dealing with Democrat Barack Obama.
"In the world of investing and economics, perceptions matter
and I believe investors will notice," said Steven Schoenfeld,
founder of BlueStar Indexes, which develops indexes and exchange
traded-funds that track Israeli stocks.
BlueStar's Israeli technology ETF ITEQ.O has gained 13
percent on the U.S. Nasdaq market since the election. So far,
the effect on the wider market has been less remarkable. While
Tel Aviv's broad index .TA125 is up 6.1 percent, it has
underperformed the MSCI World index for developed countries
.MIWO00000PUS , which has risen about 8 percent in the same
period.
The United States is Israel's largest trading partner by
country, with bilateral commerce valued at $25.7 billion last
year. Of this, more than two-thirds were Israeli exports, giving
the country a large surplus.
One stock that has already seen a big surge is Magal, whose
sensors and command and control systems help to secure airports,
borders, power plants, seaports and prisons.
Investors expect it to provide technology for the Mexican
border wall, a contract that could reap vast rewards given that
the project is expected to cost around $20 billion. urn:newsml:reuters.com:*:nL1N1FU2D4
With Magal's shares up nearly 60 percent since the election,
Chief Executive Saar Koursh is optimistic of winning work on the
wall. "Our chances are more than good," he told Reuters, noting
that the company, through its U.S. unit Senstar, was in touch
with U.S. government officials. "This definitely would be a
large scale project for us."
DEFENCE AND CYBER
Trump has also promised to boost defence spending and add
military personnel. If he follows through, this could benefit
Elbit ESLT.O , one of the biggest suppliers of drones and
helmet based systems. Elbit shares are up 20 percent since
November.
Before he took office, Trump questioned the high cost of
Lockheed Martin Corp's F-35 fighter, saying he had asked Boeing
Co to offer a price for a "comparable F-18 Super Hornet".
Such commentary caused ructions in the United States, but
the Israeli company is ready to equip the pilots whatever.
"Whether Trump sticks with the F-35 jet or goes with the F-18,
either plane will have Elbit smart helmets," Schoenfeld said.
Israel's defence industry, led by Elbit, Israel Aerospace
Industries, Israel Military Industries and Rafael, accounts for
about 14 percent of the country's exports.
The Trump administration is expected within weeks to send
Congress a request for a supplemental bill to increase defence
spending this year.
Ilanit Sherf, an analyst at the Psagot brokerage, said Elbit
could expand its annual revenue by 5-6 percent, instead of the
current 2-4 percent, if the U.S. defence budget increases
following government spending cuts under Obama.
Cyber-security firms like Check Point may also see higher
U.S. orders. Former New York City Mayor Rudy Giuliani, Trump's
cyber adviser, visited Israel last month and met Netanyahu to
discuss closer cyber cooperation.
Israel has over 450 cyber-security firms. In 2016, 78
start-ups raised more than $660 million from investors,
according to the Israel Venture Capital Research Centre.
"Trump seems to be putting an emphasis on cyber-security so
Israel and the U.S. will be even closer on the cyber-security
front," said Jon Medved, CEO of crowdfunding firm OurCrowd.
Companies such as Nice Systems NICE.TA and Verint
VRNT.O , whose voice and data analysis technology is critical
to security, may also see a boost.
Much rests on whether Trump's spending plans go ahead and
their wider effect in the United States.
"If the U.S. economy will grow, then Israel will benefit and
vice versa," said Ilan Artzi, chief investment officer at the
Halman-Aldubi investment house.
That view is shared by the head of Israel's central bank,
Karnit Flug. "As a small, open economy we are very dependent on
our major trading partners and the United States is a major
trading partner," she said in December.
But given Trump's unpredictability, economists have so far
held back on including any boost in their forecasts. The
International Monetary Fund sees Israeli growth steady at around
3 percent a year for the medium term.
Medved warned that if Israel is seen as too supportive of
Trump, it could backfire in the tech community, which is unhappy
with some of his policies, particularly on curbing immigration.
"The key issue is you want to keep tech and business out of
politics," he said. "The great bulwark of our relationship with
the U.S. is that we have been bipartisan and it's potentially
harmful for Israeli support to be associated with one party or
another."
Should the United States become more protectionist, Israeli
exports, which comprise 30 percent of economic activity, might
suffer. This could be especially so were Trump to try to use the
exchange rate to favour U.S. firms over foreign competitors.
"If Trump weakens the dollar it will have an impact," said
Uriel Lynn, head of the Federation of Israeli Chambers of
Commerce. "We export 2.5 times more than we import from the
United States."
Risks could also lie in any attempt by Trump to side too
closely with Israel. He had pledged to move the U.S. embassy
from Tel Aviv to Jerusalem, Israel's self-proclaimed capital and
a holy city at the heart of the Israeli-Palestinian conflict.
The Palestinians want East Jerusalem - which Israel captured
in a 1967 war and annexed in a move not recognised
internationally - for the capital of a state they seek in the
occupied West Bank and the Gaza Strip.
If Trump made good on his pledge, this would inflame Arab
opinion, leading to possible Palestinian and regional unrest.
"Then you would have a drop in tourism and private
consumption, which could impact the economy," Leader Capital
Markets economist Jonathan Katz said.
(Editing by Luke Baker and David Stamp)
((tova.cohen@thomsonreuters.com; +972-9-899-0222; Reuters
Messaging: tova.cohen.thomsonreuters.com@reuters.net))
Keywords: USA TRUMP/ISRAEL ECONOMY