Israel Gets a Big Boost

Never mind last year's war with Hezbollah in Lebanon, incessant rocket attacks from the Gaza Strip and growing concern about the possibility of a nuclear-armed Iran. The Israeli stock market is on a roll. Over the past five years to October 15, the Tel Aviv 100-stock index gained a healthy 29% annualized.

Now comes word that Israel's market is being called up to the big leagues, which should result in yet a higher profile for Israeli stocks. The FTSE Group, keeper of more than 100,000 stock, bond and hedge-fund indexes, says it will promote Israel from emerging-market to developed-nation status next June. Because more investors buy into developed markets than emerging nations, the change will pump an additional $3 billion into Israeli stocks, estimates Merrill Lynch strategist Michael Hartnett.

Some big investors have already noticed major-league opportunities in Israel. In its first-ever acquisition outside the U.S., Warren Buffett's Berkshire Hathaway last year bought an 80% stake in Israel-based Iscar Metalworking for $5 billion. And Americans have long been able to invest easily in the high-tech enterprises for which Israel is best known, including Amdocs (symbol DOX) and Check Point Software Technologies (CHKP).

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The biggest Israeli company is generic-drug maker Teva Pharmaceutical (TEVA), which has a market value of $34 billion. Teva's prospects look bright because the company continues to win approvals from the U.S. Food and Drug Administration to produce generic drugs as more brand-name medicines come off patent.

Stocks of Israeli banks should thrive as the government continues to privatize industries, says Cliff Goldstein, manager of the Amidex35 Israel fund (AMDEX). Bank Hapoalim (BKHYY on the Pink Sheets), the nation's largest bank, with branches throughout Europe, will be a prime beneficiary, he says.

Perhaps the best way to make a bet on the Jewish state's vibrant economy is through First Israel (ISL), a closed-end fund. In mid October, the fund traded on the New York Stock Exchange for about $23 a share, representing a 3% premium to the value of the fund's assets. But don't go overboard on Israeli stocks; they should play only a minor role in your portfolio. Israel may be a developed market, but the country is a speck in the economic universe.

As for those risks that are peculiar to Israel, says Goldstein,"there is no market as well trained at separating geopolitical news from economic news."