Investors bet on big windfall in Israeli tech stocks under Trump
Cybersecurity and defense sectors could benefit the most
Investors are betting heavily that Israeli defense and cybersecurity firms will reap a windfall from President Donald Trump’s big US 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 US 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 US 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 defense contractor Elbit Systems, Magal Security Systems and Check Point Software Technologies. All have seen their share prices soar since Trump’s election victory on November 8.
Those, and many other Israeli companies, either have US 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.
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 has gained 13% on the US Nasdaq market since the election. So far, the effect on the wider market has been less remarkable. While Tel Aviv’s broad index is up 6.1%, it has underperformed the MSCI World index for developed countries, which has risen about 8% in the same period.
The US 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 about $20b.
With Magal’s shares up nearly 60% 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 US unit Senstar, was in touch with US government officials. “This definitely would be a large-scale project for us.”
DEFENSE AND CYBER
Trump has also promised to boost defense spending and add military personnel. If he follows through, this could benefit Elbit, one of the biggest suppliers of drones and helmet-based systems. Elbit shares are up 20% 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 US, 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 defense industry, led by Elbit, Israel Aerospace Industries, Israel Military Industries and Rafael, accounts for about 14% of the country’s exports.
The Trump administration is expected within weeks to send Congress a request for a supplemental bill to increase defense spending this year.
Ilanit Sherf, an analyst at the Psagot brokerage, said Elbit could expand its annual revenue by 5%-6%, instead of the current 2%-4%, if the US defense budget increases following government spending cuts under Obama.
Cybersecurity firms such as Check Point may also see higher US 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 more than 450 cybersecurity firms. In 2016, 78 start-ups raised more than $660 million from investors, according to the Israel Venture Capital Research Center.
“Trump seems to be putting an emphasis on cybersecurity, so Israel and the US will be even closer on the cybersecurity front,” said Jon Medved, CEO of crowdfunding firm OurCrowd.
Companies such as Nice Systems and Verint, 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 US.
“If the US economy will grow, then Israel will benefit and vice versa,” said Ilan Artzi, the chief investment officer at Halman-Aldubi investment house.
That view is shared by Bank of Israel Governor 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 about 3% 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 US is that we have been bipartisan, and it’s potentially harmful for Israeli support to be associated with one party or another.”
Should the US become more protectionist, Israeli exports, which comprise 30% of economic activity, might suffer. This could be especially so were Trump to try to use the exchange rate to favor US firms over foreign competitors.
“If Trump weakens the dollar, it will have an impact,” Federation of Israeli Chambers of Commerce president Uriel Lynn said. “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 US Embassy from Tel Aviv to Jerusalem. If Trump makes 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.