Could now be a good time to buy into the Israeli stock market? The TA Blue Tech Index, an index that tracks Israeli-listed tech and biotech companies, has fallen 8 percent this year, though it is up 1.3 percent since the conflict began.
One reason for the decline is that 30 percent of the index is concentrated in three stocks, so there's bound to be volatility, said Gadi Beer, vice president of operations at AMIDEX Mutual Fund, a company that sells Israel-focused mutual funds. But Beer is still bullish.
"Israel's 'bread and butter' is technology, and it is not a resource that will soon be depleted," he said. "Many new ideas and products are coming out of the pipeline."
Israel's equities market looks fairly attractive, based on historical trading valuations, at 11.3 times one-year forward earnings, significantly below its all-time high of 31.8 times, as well as its historical average of 17.2 times, according to S&P Capital IQ.
Top 5 sectors in Israel equities market
- Health care—28.8 percent
- Financials—24.7 percent
- Information technology—12.8 percent
- Energy—10.8 percent
- Materials—8.8 percent
(Source: S&P Capital IQ, for 511 companies headquartered in Israel and part of Tel Aviv Stock Exchange)
Israel has an attractive long-term domestic story, too, Scholes said. Its economy is expected to grow between 3 percent and 4 percent this year: The IMF said in February that Israel's GDP would grow by 3.4 percent, ahead of most developed nations. It has a young population—the median age is 30—and its middle class is expanding.
That "emerging markets-like" demographic story and its technology and health-care sector concentration make it more of a growth play than other developed countries, Krey said, adding that the overall growth could slow during the next quarter due to the violence. Krey thinks the country could see a slight decline in GDP attributable to the conflict—the IMF has estimated a cost from the conflict to the Israeli economy of 0.2 percent GDP so far—and that could hurt stock returns.
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"The airline (ban) will sting—July and August are core times for tourism," Scholes said.
If the conflict drags on for an extended period of time—bucking the investor bet that a history of short, repeated conflicts will repeat itself again in this instance—or if other countries get pulled into the conflict, investors could see stock sentiment turn negative and returns suffer, Scholes said.
Krey said the Israeli market—the Tel Aviv Stock Exchange had a market cap of more than $200 billion at the beginning of the year—may not climb much higher while the fighting goes on, though there isn't a strong reason to believe it will reverse, either.
"There's still room for [stock] multiple expansion," Krey said. "That might not be immediately attainable, but once the hostility dies down, a truce is in place and Israeli troops have been removed, we could see the market rise further."
If it's easy to become convinced there's no way out of internecine Middle East conflict, stocks still find a way up, and it's not just in Israel: the Palestine Stock Exchange Index is up 0.76% since July 8, according to Bloomberg.
A brief history of war and peace—and Israel's stock market
- Operation Rainbow, May 18 to May 24, 2004: 3.1 percent*
- Operation Days of Penitence, Sept. 30 to Oct. 15, 2004: –1.85 percent
- Operation Summer Rains and Operation Autumn Clouds, June 28 to Nov. 26, 2006: 15.9 percent
- Operation Hot Winter, Feb. 28 to March 3, 2008: –2.98 percent
- Gaza War, Dec. 27, 2008, to Jan. 18, 2009: 7.9 percent
- Operation Returning Echo, March 9 to March 14, 2012: 3.3 percent
- Operation Pillar of Defense, Nov. 14 to Nov. 21, 2012: 1 percent
- Operation Protective Edge, July 8, 2014, to present: 2.24 percent
(*Returns are for the Tel Aviv 100 Index, representing the 100 largest market-cap companies listed on the Tel Aviv Stock Exchange.)
—By Bryan Borzykowksi, special to CNBC.com