Israeli Stock Market Fears Election Stalemate, New Risks Emerge
Translated & summarized from Mako by baba
The Israeli stock market anticipates political uncertainty from upcoming elections, with a study showing the market drops significantly before indecisive elections. This year, the market is also factoring in the potential economic impact of government policy, a new risk not seen in previous elections. While the market tends to recover after elections regardless of the outcome, the policy direction of the next government is a key concern for investors seeking certainty.
The story in 6 lines · by baba
- Israeli stock market anticipates political uncertainty, with a study showing significant drops before indecisive elections.
- A study of ten elections since 2003 reveals the market prices in political stagnation months before voting.
- The potential economic consequences of government policy, like the judicial overhaul, add a new risk factor this year.
- Market performance recovers after elections, with the Tel Aviv 125 index showing strong returns in the year following.
- The strengthening shekel after elections can negatively impact returns for Israelis investing abroad without currency hedging.
- The market prioritizes certainty, with economic fundamentals ultimately driving direction post-election.
The Israeli stock market is anticipating a potential political stalemate following the upcoming elections, with investors factoring in uncertainty months in advance. A new study by the Tel Aviv Stock Exchange, conducted by macroeconomist Nisan Avraham, analyzed ten election cycles since 2003. It found a consistent pattern: in the three months preceding elections that resulted in no clear outcome, the Tel Aviv 125 index dropped an average of 5.3%. In contrast, when a decisive outcome was anticipated, the index fell only 0.2% during the same period.
This time, however, the equation of uncertainty is complicated by an unprecedented factor: the perceived economic consequences of government policy. The market experienced significant downturns in the year leading up to the war, partly attributed to the judicial overhaul promoted by then-Justice Minister Yariv Levin. Conversely, the stock market rose after the war began, as investors believed the security crisis would sideline the overhaul and increase the likelihood of a government change.
Despite a dip in the Tel Aviv 35 index on October 26, 2023, a subsequent rally until May 2026 was fueled by the expectation of a new government. However, market stagnation has returned in the last five months, driven by the realization that a change in government is not guaranteed. The possibility of the current coalition remaining in power forces investors to re-evaluate risks they thought were behind them.
Interestingly, the study suggests that market performance recovers after elections, regardless of the outcome. Five months after election day, the gap in performance between decisive and indecisive elections nearly disappears, with returns of 6.7% and 6.5% respectively. Over the 12 months following elections, the Tel Aviv 125 index yielded an average annual return of 16.4%, compared to 11.5% over the entire period studied, though these gains often coincided with global market trends.
The shekel's performance also plays a role. In the year before elections, the shekel strengthened by an average of only 1.4% against a basket of currencies, while in the year after, it appreciated by 2.5%. This post-election strengthening can erode profits for Israelis investing abroad without currency hedging.
The study's main conclusion is that the market is apolitical and seeks certainty. Once the dust settles, economic fundamentals like interest rates, inflation, growth, and the geopolitical situation dictate market direction, not election results. However, the experience with the judicial overhaul indicates that the policy direction of the future government, and its impact on investor confidence, is a critical new risk factor.
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