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Israel and the MENA Region — An Unlikely, Lucrative Love Story?

On Sept. 17, 2021, Egypt announced plans to build a $4.5 billion high-speed rail line– a first for the country and a potential “Suez Canal on tracks.” The regional economic benefits could be enormous. Do you also know what happened exactly 43 years ago to that date? Another colossal, region-shifting move. Israel and Egypt signed the Camp David Accords, making Egypt officially the first Arab country to recognize the “Jewish State” and normalize ties. We’re over 3/4 through with 2021, and to say the least, opinions on Israel remain fluid and polarizing. Take the U.S., for example. Ever since Israel’s founding, the U.S. has been the country’s staunchest ally, with ironclad and bipartisan support. A recent example is how many states reacted after Ben and Jerry’s halted sales in the West Bank to protest against Israeli settlements. From both sides of the political spectrum, many state funds have sold or threatened to sell their holdings in Unilever, Ben and Jerry’s parent company. The New Jersey Division of Investments said it planned to sell $182 million of stocks, bonds, and other securities linked to Unilever. That’s because it formally accused the company of breaking state laws against boycotting Israel. Arizona, earlier this month, also said that it would sell the last $50 million of its investments in Unilever by Sept. 21 for the same reason. New York, Florida, and Texas have also stated they are evaluating their funds’ Unilever exposure. Israel still has a much better image in the U.S. than the Palestinian Authority. The Republican party especially remains staunchly pro-Israel. However, sympathies from the Democrats are now split, as the far left branch of the party now tilts pro-Palestinian.
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Source: Gallup
On the Arab street, Israel remains deeply unpopular. The Qatar-run Arab Center for Research and Policy Studies (ACRPS) conducted an opinion poll between November 2019 and September 2020 across 13 Arab countries, including Egypt, Saudi Arabia, and Iraq. The results showed overwhelming disapproval of any normalization with Israel. “An overwhelming majority (88%) of Arabs disapprove of recognition of Israel by their home countries, with only 6% accepting formal diplomatic recognition,” said the report. Yet countries in the region appear to be gradually warming up to Israel. After Egypt made peace with Israel, Jordan was the next domino to fall in 1993. In August 2020, the Abraham Accords were passed, which formally recognized business ties between Israel and the United Arab Emirates. Soon after, Bahrain, Sudan, and Morocco followed suit. Many other Gulf States have maintained covert ties with Israel, too, most notably Saudi Arabia. According to the Brookings Institute, “Saudi Arabia, as part of this axis of like-minded states pursuing coordinated foreign policy objectives, shares strategic motivations with the UAE and Bahrain in regard to Israel. Indeed, Riyadh and Tel Aviv have cooperated covertly for years, mostly around security issues and intelligence-sharing, but the Gulf kingdom has its own calculus in terms of its readiness to formalize relations.” Many analysts argue that recognizing Israel represents a minority of how the Middle East truly feels. In their views, these deals broke with a long-standing idea that Arab nations would never normalize with Israel until a comprehensive peace was reached with the Palestinians. At the same time, many Palestinians call the agreements treasonous and a “stab in the back.” So if everyone in the Middle East hates Israel so much, why are more and more countries making peace? It’s pretty simple. It’s not because these countries all of a sudden fell in love with Israel. Regardless of which side of the fence anyone stands on, the bigger picture makes a clear statement: if it makes dollars, it makes sense. Take emotions out of the equation. If you look beneath the surface and ignore politics and conflict, peace with Israel has proven to be big business.

What’s Happened Since the Abraham Accords?

According to figures cited by Israel’s Central Bureau of Statistics, the first seven months of 2021 saw booming trade for Israel in the MENA (Middle East North Africa) region thanks to the Abraham Accords. Trade grew by 234% compared to the same period in 2020- and none of those numbers even included trade in tourism and services.
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Source: TRT World
The largest volume was with the United Arab Emirates (UAE), which surged from $50.8 million between January and July 2020 to $613.9 million over the same period in 2021. Trade with Jordan this year also increased from $136.2 million to $224.2 million. Meanwhile, data showed volumes with Egypt rose from $92 million to $122.4 million, and trade with Morocco grew from $14.9 million to $20.8 million. Bahrain, which had no trade to speak of with Israel during the first seven months of 2020, also registered $300,000 in commerce during 2021’s first seven months.

UAE and Israel: The Biggest Winners

The Emirati and Israeli economies are the most prominent winners in this unlikely new love affair. Both the UAE and Israel are regional economic powerhouses, and both stand to benefit from the Abraham Accords. Before 2020, Israel and the UAE long had unofficial relations through various economic, political, and cultural exchanges. Too much money, though, was being left on the table for these two countries. So they officially “put a ring on it.” Israel has long assisted the UAE with security through cyber and surveillance technology transfers. The UAE has long been a significant oil player and a central global hub for trade and re-export capital. The UAE, after all, does most of its business with China ($35.5 billion), India ($28.6 billion), the U.S. ($17.1 billion), Saudi Arabia ($11 billion), Germany ($9.72 billion), and the U.K. ($9.5 billion). Under this agreement, Israel now has exposure to another robust global trade network. While Israel accounts for substantially smaller trading volume than the UAE’s top partners, the UAE has prioritized deepening its Israeli business ties. On September 13, for example, the UAE’s economy minister Abdulla Bin Touq said that the UAE was projecting to grow economic ties with Israel to the tune of $1 trillion over the next decade. Since normalization, the UAE has signed over 60 memorandums of understanding with Israel, a country with the world’s third-ranked start-up ecosystem, according to StartupBlink. The UAE also expects an “influx” of trade over the next couple of years, primarily in defense, energy, and food security. “We have $500 to $700 million dollars of bilateral trade happening, we have funds of billions of dollars that have been announced jointly between the two countries,” he said. “We are moving into so many areas of economic opportunities.” Among those “economic opportunities” include:
  • Abu Dhabi’s Mubadala Investment Co. inking a $1 billion purchase of a 22% stake in Delek Drilling’s East Mediterranean Tamar natural gas field earlier this month, marking the most significant deal between the two countries yet.
  • In March 2021, the UAE announced a $12 billion investment fund for strategic sectors in Israel, including energy manufacturing, water, space, healthcare, and agri-tech.
  • Earlier this year, Emirati and Israeli ministers pledged military and defense cooperation. The Israeli defense chief envisioned a “special security arrangement” between the two states.
You can play this arrangement in several ways:

1. iShares MSCI UAE Capped ETF (UAE)

Since the Abraham Accords were signed, this ETF has been stable and strong. It has almost moved vertically by 50.85% from as low as $10.03 in November 2020 to its $15.13 closing price on Sept. 17, 2020.
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Source: Stockcharts
The iShares MSCI UAE ETF seeks to track the investment results of a broad-based index composed of UAE equities. For a long time, the UAE has been one of the most potent and fastest-growing economies in the Middle East. But now, with relations with Israel, it has exposure to one of the most advanced high-tech economies in the world. After all, did you know that Israel has the most NASDAQ-listed companies outside of North America?

2. iShares MSCI Israel Capped ETF (EIS)

Suppose you aren’t up for doing extensive research on discovering individual Israeli stocks. In that case, the iShares MSCI Israel Capped ETF is an easy option. Actively trading since 2008, this ETF is one of the first and most popular options for investors looking for exposure to Israel. It holds a comprehensive basket of 104 holdings, with NICE Ltd, Checkpoint Software, Bank Leumi, Wix, and Bank Hapoalim rounding out its Top Five holdings. The ETF has seen some peaks and valleys, most notably during the latest Gaza conflict in May. Yet, after the Abraham Accords were announced last August, it touched a low of $49.91 in late September 2020 and advanced 45.48% to its Sept. 17, 2021 closing price of $72.61.
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Source: Stockcharts

3. BlueStar Israel Technology ETF (ITEQ)

Want more direct exposure to cutting-edge Israeli tech? Consider the ​​BlueStar Israel Technology ETF. Established in 2015, this ETF was the first fund in the world to focus explicitly on Israeli tech. While it has seen much more explosive moves than the iShares MSCI Israel Capped ETF, it has also seen significantly more volatility. It surged 57.63% between late September 2020 and mid-February 2021, before the tech sector got rocked by rising bond yields. Then, after getting rocked from the Gaza War in May and dipping to $59.31, the ETF rallied again. It popped another 16.37% to its $69.02 Sept. 17, 2021 closing price. As it remains slightly above both its 50-day and 200-day moving averages, it could be at a very enticing entry point when you consider regional economic catalysts.
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Source: Stockcharts
The basic requirement to be included in this ETF contains one of the following:
  • At least 20% of the company’s employees are located in Israel.
  • 20% of long-lived assets are located in Israel.
  • The company has a major R&D center in Israel.
With its top five holdings consisting of NICE Ltd, SolarEdge Technologies, Inc., Check Point Software, Amdocs Limited, and, ITEQ provides investors exposure to the innovation of Israel’s economy and some of the most in-demand and cutting edge companies in the world.

4. ARK Israel Innovative Technology ETF (IZRL)

Cathie Wood is now on the Israel bandwagon, and investors everywhere need to pay attention. If you aren’t familiar with Cathie Wood, you should be. She is a rockstar stock-picker and the founder of the $60 billion ARK Invest Company. ARK has made waves in finding the next prominent innovators powering the world’s future, such as self-driving cars, fintech, genomics, and more. That’s just a basic summary, but her funds were by far the biggest winners in 2020 and have continued to perform well in 2021, despite the skeptics and more challenging climate. The world pays attention when Cathie Wood makes a move, and the IZRL ETF is no different. “We didn’t set out to do a country-specific fund that happened to be focused on innovation. We set out to do an innovation fund and happened to focus on Israel,” said Tom Staudt, ARK’s director of product development and COO at the time of the ETF’s inception. ​​ARK’s investment theses are based on the concept of disruptive innovation, and Israel and Israeli-based companies were continuously showing up in the firm’s research, Staudt added. “As we evaluated the market, what we recognized was that Israel was regularly being named a top innovative country.” Established in 2017, the ARK Israel Innovative Technology ETF draws components from health technology, communications, technology services, electronic technology, consumer services, and producer manufacturing sectors. Specifically, it focuses on holdings with operations causing disruptive innovation in genomics, health care, biotechnology, industrials, manufacturing, the internet, and information technology. As of Sept. 17, 2021, its Top 5 Holdings were, Plasson Industries, Enlivex Therapeutics, Inmode Ltd., and Kornit Digital Ltd. While this ETF, similarly to ITEQ, has seen some volatility, it’s seen some massive moves too. It skyrocketed 63.86% from its late September 2020 low of $23.66 to its mid-February 2021 peak of $38.77. After pulling back to $28.26 due to the May war, it rallied another 7.54% to its Sept. 17, 2021 close of $30.39.
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Source: Stockcharts

Long Term — What Could Happen?

With Israel, you always have to worry about war and geopolitical tensions as an existential risk. This is what the country has been dealing with for over 70 years and will continue to deal with. Having said that, the Abraham Accords, in the first year, have proven to be a boon for the region’s economy. Numbers don’t lie as much as political opinions do. Country-specific ETFs may not exist for many of the other regional beneficiaries (yet). However, the impact the accords have made on the already strong economies of the UAE and Israel is earth-shaking. Want to know what the alternative is? Look at Israel’s northern neighbor Lebanon. Lebanon’s capital city Beirut was once one of the most cosmopolitan cities in the entire Middle East. Now Lebanon is on the verge of being a failed state. The country is in the midst of a gas crisis, and in March, inflation reached an unbelievable 160%. Bakers can’t even make knafeh anymore because “ingredients are too expensive.” Then there’s electricity. Those without generators get about an hour or two a day. Yet even those who can afford a generator aren’t receiving sufficient electricity because generators require fuel. This takes us back to the countrywide gas crisis. According to the latest policy brief, the “Multidimensional Poverty in Lebanon: Painful Reality and Uncertain Prospects,” the multidimensional poverty rate in Lebanon has nearly doubled from 42% in 2019 to 82% in 2021. The militia Hezbollah is a sworn enemy of Israel and holds significant power in Lebanese politics. So it’s pretty apparent Lebanon won’t be economically cooperating with Israel any time soon. Which poses the following questions. Would you rather be a failed state or the UAE? Would you rather have a militia milking your resources just to destroy Israel, or would you rather have economic cooperation? If Lebanon had an arrangement with Israel similar to what the UAE has, how different do you think their fortunes would be? Peace, if not economic cooperation, is better than the alternative. The sooner that other countries understand that the better off they will be. Who could be the next to realize this and benefit?

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