Very Real Profits in the Holy Land

07/23/2009 11:00 am EST

Focus: ETFS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of Vardy’s Global Bull Market Alert, says the Israeli market has been doing well this year, and this new “developed market” should continue to outperform.

With economic recovery looking to take longer than was thought just a few weeks ago, the urgency for buying shares has waned. After seeing a 40% to 50% move off the bottom, global markets continue to be locked in a trading range, consolidating their gains of the last four months.

At the same time, individual stock markets are starting to show divergences in performance. The Chinese markets (mainland China, Hong Kong) continue to perform strongly, while other markets like Russia are now in a full technical correction, having dropped over 20% from their peak.

This kind of see-saw trading is actually quite typical of the summer months, and I expect the range-bound trading to continue. It would take a spate of unexpectedly bad news to take global stock markets much farther down from their current levels. On the other hand, the markets are so technically oversold that they are due for at least a moderate bounce, [which] may have already started.

This week's pick is a bet on a low-profile foreign market, Israel, which has turned out to be one of the world's top performers this year: The iShares MSCI Israel Cap Invest Mkt Index (NYSEArca: EIS) [is up more than 50% from its March lows—Editor]. Here's why I expect the Israeli market to continue to perform well over the next few months.

First, before the onset of the global recession, Israel’s GDP has been growing solidly around 5% for the past few years. Barclays Capital sees Israel's economy rebounding in 2010 to grow 2.9%, following a drop of only 1.8% in 2009. The Israeli shekel also has been one of the strongest currencies in the world over recent years. That means US investors in Israeli assets benefit greatly from Israeli currency exposure.

Second, Israel has just graduated from “emerging market” to “developed market,” according to Morgan Stanley Capital International (MSCI). By contrast, two of Asia's original “tiger economies,” South Korea and Taiwan, were under review for an upgrade, but remained “emerging markets.”

In any case, rating Israel a developed market constitutes a vote of confidence in Israel's economy. It also means that developed-market, index-tracking capital will be pouring into the Israeli stock market.

Finally, even a decade ago, the Israeli stock market was covered not only by emerging-market managers, but also by mainstream technology investors. Israel's technology industry was that dominant. But with financial stocks, pharmaceutical, and industrial chemicals each approximately 20% of the MSCI Israel index, investing in this week's pick is about more than just investing in the Nasdaq of the Middle East.

So, buy EISand place your stop at $36.50. (It closed above $43 Wednesday—Editor.)

Subscribe to Vardy’s Global Bull Market Alert here…

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