By Caitlin Ostroff 

The fastest Covid-19 vaccination rollout in the world is drawing investors to Israel, making its stock market one of the top performers in 2021.

Israel's benchmark TA-125 stock index has gained nearly 6% this year in dollar terms, outperforming both the S&P 500 and the eurozone's Euro Stoxx Index. Last year, the TA-125 didn't fare as well as either of those gauges, rising just 4.3% in dollar terms.

Investors are betting Israel's widespread rollout of Covid-19 vaccines will put it among the forerunners for a post-pandemic economic recovery. The small country -- whose roughly nine million population is about the size of New York City's -- has vaccinated nearly a fourth of its people in just under a month.

Money managers globally are seeking new investment opportunities after a sharp rally in 2020 left many U.S. stocks, particularly in the technology and media sectors, with rich valuations.

This year, they are betting that Covid-19 inoculations will accelerate the global economic recovery. Their attention is shifting to stocks that are closely linked to economic performance, such as banking and energy, and to sectors and markets that have underperformed and are considered cheap.

"Israel is going to be the poster child of how countries get their populations vaccinated and recover," said Sean Darby, a global equity strategist at financial services group Jefferies. "The market hadn't appreciated how quickly the vaccine could be rolled out."

Mr. Darby is encouraging clients to buy shares in Bank Leumi, one of Israel's biggest lenders, and the Tel Aviv Stock Exchange.

"The banking sector represents Israel Inc.," he said. "It's the best temperature gauge of the whole coronavirus effect on the economy."

Shares in Israel's three largest banks are up more than 7% this year in local currency terms, after each declined over 20% in 2020. An economic rebound is expected to bolster the nation's lenders, which came under pressure last year as investors worried the pandemic would sap their earnings and result in more defaults by customers.

In January, Israel's central bank said gross domestic product -- the broadest measure of goods and services produced across the economy -- was likely to rise 6.3% this year due to the rapid pace of vaccinations, after an expected contraction of 3.7% in 2020.

The brightening prospects have drawn global investors' attention, who typically allocate only a small portion of their portfolios to its stock market.

Fund inflows into Israeli equities and bonds picked up in December: Its markets attracted almost $2.2 billion net from foreign investors, after roughly $600 million net was withdrawn in November, according to the Institute of International Finance. Meantime, the U.S.-listed iShares MSCI Israel exchange-traded fund, which tracks shares of Israeli stocks, has climbed 4.4% this year.

Israeli lenders aren't usually on the radar for global money managers, who tend to focus on the much larger U.S. and European financial sectors, but the speedy vaccination program has boosted their appeal.

"One of the more relevant ways to invest in this recovery is through the Israeli banks," said Borja Ramírez, an equity research analyst at Citi Research, who like Jefferies's Mr. Darby is advising clients to buy shares of Bank Leumi.

In addition, Israel's technology sector has fared well through the pandemic, and strong investor demand is likely to continue as widespread remote working continues, said Liam Peach, emerging Europe economist at Capital Economics.

The technology sector, which is a major contributor to Israel's economy, dominates its benchmark index, accounting for about 27% of the TA-125 gauge. Banks have an 18% weighting, followed in contribution by the real estate and construction sector.

"The composition of the stock market lends itself quite well to the recovery Israel is going to see," Mr. Peach said. "It's just a very positive story for Israel: It's going to be one of the economies that comes through this crisis with a smaller loss of output than many others."

Israel's vaccine-rollout program and the pace of its economic recovery are being closely scrutinized by investors looking for a potential road map for other countries. Israel will "give us a feel for what we have to look for to reopen economies," Mr. Darby said.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com

(END) Dow Jones Newswires

January 15, 2021 05:40 ET (10:40 GMT)

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