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Israeli Investors Buy at the Sound of Cannons

TEL AVIV, Israel -- Israel's capital market showed surprising resilience this week amid continued unrest between Israel and Hezbollah forces in Lebanon and an escalating situation on both the Gaza and West Bank fronts. Israeli ADRs were lower early Friday in New York but had been largely supported this week by signs of a possible halt in interest rate hikes, which rippled through numerous emerging markets.

The Tel Aviv 25 index closed up 1.2% on Thursday and was up 2% this week, after falling nearly 10% during the first two days of the fighting. The TA 100 index was up 3% this week, and the Tel Aviv Real Estate 15 index closed 5.5% higher. The Tel Aviv Stock Exchange is closed on Fridays.

"Israeli institutional investors have been buying since Sunday, but the market Thursday was lifted more by Wall Street than anything else," said Danny Farhi, head of institutional sales at Excellence Nessuah, an Israeli investment house. "Interestingly, the market came back up close to the prewar levels. Now the question is: How much is this going to damage the economy?"

Credit rating agency Fitch says it expects Israel's debt-to-GDP ratio, which fell below 100% last year thanks to the government's tight spending control and buoyant corporate revenue, will "continue to fall in all but the most extreme of downside scenarios." Fitch continues to forecast a 2006 GDP growth of over 4%, which correlates to a consensus among Israeli economists expecting only a slight decline in GDP, of roughly 2 to 4 basis points, due to these events.

CIBC and Merrill Lynch both issued upbeat reviews on Israel this week. CIBC opined that Israeli companies in New York were already trading at historically low multiples even before the events in Lebanon began. Among them, CIBC noted Scopus (SCOP), the digital video networking provider, which recently traded at a price-to-earnings ratio of 27.3, just below the industry average of 28.6, and Ceragon Networks (CRNT), which specializes in wireless networks for mobile phones.

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