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How to Profit From Palestinian Bid for Statehood

September 19, 2011 9:07 am
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The United States and Israel have been scrambling to gain enough votes to block a United Nations vote to recognize a Palestinian state.

Palestinian Authority President Mahmoud Abbas said that he will ask the fifteen member United Nations Security Council to recognize Palestine as the United Nations’ newest member. If the Security Council votes in favor of Palestinian statehood, then the United States may be forced to veto the move. While Israel and the United States oppose the current move by the Palestinian Authority to give the full rights and recognition of a sovereign nation to the Palestinians, early indications show that most members of the United Nations Security Council are in favor of Palestinian statehood. Also in the Palestinians favor, a recent BBC worldwide poll found that 49% of respondents support of a Palestinian state, while only 21% oppose one.

Investors shouldn’t look so much at the political ramifications of a Palestinian state but at the long term economic ones. While the state of Israel would lose much of its leverage against the Palestinians if they gain statehood, the economy of Israel could actually prosper. Unless you’re of the firm belief that Israel always gives precedence to the economic interests of its citizens over the state’s political goals, this is worth further consideration.

The Palestinian issue has badly damaged Israel’s relationships with the governments of Turkey and Egypt and has long been the focus of widespread international criticism of Israel. Although a Palestinian state would remove much of the bargaining leverage Israel currently has over the Palestinian Authority, it would also ease longstanding tensions between Israel and the Muslim world.

One of the Israeli government’s chief concerns is that as a United Nations member state, Palestine would have greater access to international courts and other institutions where it could air its grievances with Israel. Israel claims that international institutions would be biased against Israel. However, if Israel is finally forced to stop some of its most controversial activities, such as building settlements in the West Bank, Israel’s political and economic stability could actually improve.

Israel may complain that if it were ever to abandon some of its most criticized policies like the housing settlements and blockades, that its security would be compromised. However, the very policies that Israel wants to continue to use against the Palestinians are the Palestinians greatest propaganda tools against Israel. If Israel were to abandon these practices and still suffered terrorist attacks from Palestinian territories, than international criticism would shift to the Palestinians. This would increase Israel’s trading opportunities with most Muslim states and improve its image in the eyes of the world.

For their part, most Muslim governments are under increasing pressure from their own citizens to improve economic opportunities and increase political freedoms. Many of these governments have long blamed outside influences (the United States and Israel) for many of their internal problems. That won’t work as well now that the Arab Spring has forced many long standing Muslim leaders to take responsibility for their records and step down or be forced from office.

If the Palestinians gain statehood during such an environment and Israel abandons its most controversial activities, the economies of Israel and many Muslim countries could benefit. If this happens, then Israeli stocks like Teva Pharmaceutical Industries (Nasdaq: TEVA), Cellcom Israel (NYSE: CEL) and Alvarion (Nasdaq: ALVR) could see their share prices move higher.

Investors who would prefer to invest in a wide range of regional stocks might want to consider the iShares MSCI Israel Capped Investable Market Index Fund (NYSE: EIS), the Market Vectors Egypt Index (NYSE: EGPT) and the SPDR S&P Emerging Middle East & Africa (NYSE: GAF) ETFs. They could also climb higher if Palestinian statehood and the Arab Spring usher in a new era in the Middle East.

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