NEW YORK (TheStreet) -- The Israeli economy is strong, growing fast and offers good value, which is why William Scholes, investment manager for Aberdeen Asset management, sees Israeli stocks swinging higher after an already impressive run this year.
"The economy is at an interesting stage now with a new cabinet sworn in. We think at the end of the regulatory tightening cycle it is going to be positive for businesses. We also think the economy is in good shape," said Scholes. "Unlike many of the other faster-growing economies, Israel does not have structural imbalances that make it more vulnerable to a Federal Reserve rate hike."
The Aberdeen Israel Fund, which Scholes helps manage, is up over 14% for the year to date. The closed-end fund is trading at a 12.5% discount to its net asset value so investors are receiving 100 cents worth of assets for 88 cents.
Nearly a quarter of the fund is made up of generic drug makers Teva Pharmaceuticals (TEVA) and Perrigo (PRGO). Both companies are locked in a wild M&A affair with fellow pharma Mylan (MYL). Luckily for Scholes, the tangled dance involving the three companies is lifting the fortunes of his fund. Teva shares are up 5% year to date while Perrigo is up over 12% so far this year.
"The proportion of the fund has grown as these stocks have risen amid the merger speculation. Our outlook is that regardless of what happens with the mergers themselves - and at the moment it's unclear which way this is going to go - we still think these are strong businesses," said Scholes.
Information technology and cyber security comprise another large chunk of the Aberdeen Israel portfolio with Check Point Software (CHKP) at over 11% of the fund's assets. "Check Point is recognized as one of the leaders in network security software," said Scholes. "One of the things that underpins that and makes it attractive from our point of view is that continued sales into their installed base at the level of recurring revenues makes their business model a very visible one. And they are highly cash generative."
Israeli companies, of course, do operate in a turbulent part of the world. Scholes, however, does not clearly see those worries reflected as a discount in Israeli stock multiples. "The higher rated, largely U.S. listed stocks are trading near a 20 times [price to earnings ratio] and some of the domestic peers do come a bit cheaper so for a lot of the companies focused on the domestic economy particularly consumer staples stocks. And some of the financials those are at a discount," said Scholes. "But if there is a discount for geopolitical reasons I think that's harder to say and it's not substantial if indeed there is one."