Let's talk war in the Middle East. Coming as no surprise, the Middle East grows more combustible each day as tensions heighten between Iran and Israel. The question is, will Israel launch a preventative strike on Iran to ensure the safety of its people and its national interests? And if so, when?
Economically the possibility that Israel will attack Iran is being priced into its stock market as we speak. We have seen a significant decline in one of Israel's most valued stocks—Teva (TEVA), a global pharmaceutical. Since its high in May, Teva has lost 12% of its market cap after reporting better than expected earnings; making the stock even more attractive was the following quarter where Teva maintained their standards.
How does Teva compare? Versus the S&P 500, Teva boasts:
- 8.8% earnings yield Vs 6.8%
- P/B: 1.6 Vs 2
- P/E: 13.1 Vs 13.7
So the security is cheap, and relative to its past performance it is cheap. What's more is the success of the pharmaceuticals industry this year showing a positive 7.2% YTD performance. What's not to like? The prospect of war.
If Israel attacks Iran you can be sure Israeli equities will languish at best. But, given our outlook (see below) we find the prospect of an Israeli attack to be economically disastrous and politically risky. Post November we find it to be nearly unfathomable. Consequently, if you're looking to speculate on a war, TEVA may be the perfect stock to play.
Outlook for War:
Let's talk about Israel's political options. If Israel were to attack Iran to defend its national interests and its people, it would like to have the approval of the US government. In order to get such, Israel would need to present intelligence to the public demonstrating that Iran does in fact have the capacity enrich uranium to a weapons grade level while also providing evidence surrounding their intent to use it on Israel. Though the latter may not be difficult to prove, the former is. The presidency, with Sheldon Adelson on their side or not, cannot risk another "Iraq" debacle and therefore would have to be sure in its assumptions and its intelligence before supporting the Israeli State.
But! Israel can attack without the consent of the US as long as they do it before November. President Obama, though a supporter of the sovereignty of Israel does not support unqualified actions on Israel's behalf. If Israel were to attack Iran before November, it would require Obama to make a very important decision—maintain his political platform that interfering with another sovereign nation must be done so on qualified grounds consequently forgoing the crucial votes of left-leaning Republicans on the eve of re-election or keep quiet for his own political career's sake.
It is impractical to suppose that we will ever have clarity regarding the Iranian nuclear program, therefore to create certainty it would be in the interest of the Israeli Nation to end the threat altogether with a preventative air strike. However, it would not be in their economic interest. If Israel goes through with the strike they can guarantee retaliation from Iran, Hezbolla, and Hamas. Moreover, it would not be outlandish to discount the possibility that we see another anti-Israeli coalition spring up in the midst with Syria making an incursion into Turkey and the Muslim States rallying against Israel, haphazardly taking the Iranian's side causing the Middle Eastern stock markets to tumble and oil to skyrocket.
Written by Mark Blumenfeld. The interests, opinions, comments and recommendations expressed by the author do not represent the interests, opinions, comments or recommendations of Kapitall Inc. or its affiliates.
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