WarSclerotic

Israel, under threat of war from its neighbors since being founded in 1948, produced better risk-adjusted returns than all other developed stock markets in the past decade as the technology-driven economy attracted global investors.

The Bloomberg Riskless Return Ranking shows the Tel Aviv TA-25 Index (TA-25) returned 7.6 percent in the 10 years ended February 17, after adjusting for volatility, the highest among 24 developed- nation benchmark indexes. Israel beat Hong Kong’s Hang Seng Index (HSI), the next-best market with a risk-adjusted gain of 6.7%, and Norway, which had the highest total return.

Israel outperformed as it fought a month-long battle against Hezbollah in 2006, was involved in a similar conflict with Hamas two years later and is now threatened by Iran’s nuclear program. International investors including Warren Buffett bought local companies and the economy, steered by Bank of Israel Governor Stanley Fischer, grew more than twice as fast as the US last year. Israel’s stocks may extend gains as Apple Inc. and IBM acquire the country’s technology startups.

“Israel is an exciting place to invest,” Michael Steinhardt, the former hedge fund manager who produced returns averaging 24% a year over almost three decades until he retired in 1995, said in a telephone interview from Fisher Island, Florida. “The country is surrounded by enemies, it’s always on the edge of extinction, but it expands and prospers.”

Beating Norway

The Israeli gauge returned 161% including dividends over the last decade, the third-best performance among developed markets after Norway’s OBX Index and the Hang Seng.

“This is a great achievement,” Israeli Prime Minister Benjamin Netanyahu said in response to the article in the Knesset yesterday.

The TA-25’s biggest members are Bank Leumi and Teva Pharmaceutical Industries, each with an 11% share.

Fischer’s Role

Bank of Israel’s Fischer, a former thesis adviser to Ben S. Bernanke, helped steer the economy back to growth after the worst global recession since World War II. Fischer, who is serving his second term as governor, began buying foreign currency in 2008 after the shekel reached a 12-year high. That more than doubled the central bank’s reserves in an effort to help exports, which are equal to 40 percent of gross domestic product.

Israel’s economy probably expanded 4.8% in 2011, according to the International Monetary Fund, compared with 1.7% growth for the US, data from the Bureau of Economic Analysis show. That follows five years of average annual growth in Israel of 4.2%, boosted by foreign investment in local companies.