Israeli Elections Could Impact Shekel, Market Performance

Upcoming parliamentary elections in Israel may significantly influence the national currency, stock market performance, and international investor sentiment, despite the market's substantial growth during years of conflict. Analysts suggest that the outcome will depend on the composition of the next government and the ability to de-escalate regional tensions. Some investors anticipate a potential rise in Israeli assets if the opposition defeats Prime Minister Benjamin Netanyahu, believing a change in leadership could improve relations with Western allies, reduce political risks, and strengthen the shekel. JPMorgan estimates that election results could shift the shekel's exchange rate by approximately 3%, with an opposition victory potentially bolstering the currency while a Netanyahu-led government might have the opposite effect. Investment firm IBI also expects a positive market reaction to an opposition win, with Chief Economist Rafi Gozlan stating it could lower the risk premium on Israeli assets and strengthen the shekel. Equity Bank's Chief Economist Charlie Robertson noted that Netanyahu's re-election might increase the likelihood of further conflict with Iran, whereas his defeat could be perceived by some market participants as a de-escalation factor. However, there is no consensus on the election's economic consequences, as some international investors remain confident in Israeli assets regardless of the political outcome. Sergey Dragchev of Union Investment, for example, expressed positive expectations for Israeli bonds, citing their lower volatility and the potential for regional conflicts to subside.

Since the Hamas attack on October 7, 2023, the Tel Aviv Stock Exchange has surged approximately 130%, outperforming the U.S. stock market's roughly 80% gain over the same period. The Israeli shekel has appreciated by 25%, making it one of the strongest performing global currencies. This market resilience is attributed to Israel's advanced tech sector, global interest in artificial intelligence, and a near doubling of defense spending to about 8% of GDP. Despite this growth, economic risks persist. Foreign investors remain cautious, with the share of global investment funds holding Israeli stocks falling to a record low, according to Copley Fund Research. The war has also inflicted significant economic damage, with the Bank of Israel estimating costs exceeding $55 billion by last year, and a cumulative loss in GDP growth of 8.6%. Public finances are also a concern, with Israel's national debt approaching 70% of GDP, up about 10 percentage points since 2022, and a projected budget deficit of around 4.5% of GDP, up from less than 2% pre-war. Bank of Israel Governor Amir Yaron has stressed the need for fiscal flexibility to address ongoing challenges, including potential conflict with Iran.

Market participants identify political uncertainty as a key risk, particularly the scenario where no political bloc can form a stable government. Prolonged coalition negotiations or new elections could delay budget approvals, reforms, and investor-critical decisions. Historically, however, election impacts on the Israeli stock market have often been temporary. Research by the Tel Aviv Stock Exchange on ten previous elections showed that while volatility could reach 45% in the weeks following a vote, initial losses were typically recovered within a month, with an average index gain of about 1.7%. Over the year after elections, the TA-125 index averaged a 16.4% gain, compared to its long-term average annual return of 11.5%. Analyst Nissan Avraham of the exchange's research division noted that political deadlock can pressure stocks before an election, but the effects of such uncertainty usually diminish within months.