Israeli Markets: Election Outcome May Shift Shekel Value

Investors are preparing for potential market shifts following Tuesday's Israeli general election, with some analysts predicting the shekel could swing by as much as 3% depending on the result. JPMorgan noted that an opposition victory would likely strengthen the currency and improve Israel's standing with Western allies, while a second term for Prime Minister Benjamin Netanyahu might weaken it. The primary focus for traders is how the outcome affects regional stability and political risk rather than immediate domestic policy changes.

Current polls indicate a tight race. Neither Netanyahu's Likud bloc nor the opposition alliance led by former military chief Gadi Eisenkot is projected to secure the 61 seats required to form a government in the 120-seat Knesset. This stalemate raises the possibility of prolonged coalition negotiations or another election. Despite this political uncertainty, Israeli assets have performed strongly. The Tel Aviv stock market has risen 130% since the October 2023 Hamas attacks, significantly outperforming Wall Street's 80% gain over the same period. The shekel has also climbed 25%, marking one of the strongest currency performances globally.

Market strength is attributed to Israel's tech sector and the global AI boom. Defense spending has nearly doubled to approximately 8% of GDP, providing additional economic support. Bill Ackman, a billionaire investor, stated that a government without far-right ministers Itamar Ben-Gvir and Bezalel Smotrich would signal a new chapter, potentially aiding international credibility and the expansion of the Abraham Accords. Rafi Gozlan, Chief Economist at IBI Investment House, said an opposition win would likely lower Israel's risk premium and create appreciation pressure on the shekel.

Charlie Robertson, chief economic adviser at Equity Bank, highlighted that the result will determine regional dynamics. He argued that a Netanyahu reelection could increase the chances of further escalation with Iran, whereas a defeat might lessen tensions. However, not all investors expect losses if Netanyahu remains in power. Sergey Dergachev of Union Investment has been buying Israeli bonds, betting on the fundamental strength of the economy. He described the outlook as constructive, noting that bonds are less prone to major swings and that regional conflicts should eventually ease.

Fiscal indicators show strain. Public debt has reached nearly 70% of GDP, about 10 percentage points higher than in 2022. The budget deficit is expected to remain around 4.5% of GDP, up from less than 2% before the conflict. Central bank head Amir Yaron stressed the need to preserve adequate fiscal policy space. Israeli government bonds have returned about 30% over the last two years, more than double the main emerging market indexes. Christopher Granville of TS Lombard cited central bank estimates that the war cost the economy more than $55 billion by last year.

Historical data suggests that election results have limited long-term impact on Israeli companies. Research from the Tel Aviv Stock Exchange covering the last 10 elections found that volatility in leading share indexes rose by as much as 45% in the weeks after voting. However, initial losses were typically recovered within a month, with indexes posting an average gain of about 1.7%. Over the following year, the TA-125 returned an average 16.4%, compared with a long-term annual average of 11.5%. Nissan Avraham, an analyst at the exchange, said political deadlock often weighed on stocks before voting, but the effects faded within months.

Some investors are looking outside Israel for opportunities. Jean-Charles Sambor of TT International said an opposition victory could ease regional tensions and benefit Lebanese bonds. He described Lebanon as a good proxy for trading the election outcome. Foreign investors remain cautious overall, with Copley Fund Research data showing the share of global funds holding Israeli equities is at a record low, having fallen sharply since 2023.