Israeli Stock Market Braces for Declines Amid Political Uncertainty
Translated & summarized from Bizportal by baba
The Tel Aviv Stock Exchange is expected to fall Tuesday due to political uncertainty, with analysts noting that a larger governing bloc could weaken the market. J.P. Morgan anticipates a political stalemate, leading to a continuing budget and potentially limiting new spending. Scenarios include a change in government strengthening the shekel or the continuation of the current bloc weakening it, alongside potential security escalations impacting the market.
The story in 5 lines · by baba
- Tel Aviv Stock Exchange anticipates declines Tuesday amid heightened political uncertainty.
- J.P. Morgan predicts a political stalemate will necessitate a continuing budget.
- A change in government could strengthen the Israeli shekel, while continuity might weaken it.
- Foreign investor holdings of Israeli stocks have fallen to an all-time low.
- High oil prices around $110-$115 per barrel add to inflationary risk.
The Tel Aviv Stock Exchange is anticipating a decline on Tuesday, driven by heightened political uncertainty. Analysts suggest that a larger political bloc, particularly one associated with Prime Minister Netanyahu, increases the likelihood of market weakness. This sentiment reflects investor expectations rather than a political statement.
Dual-listed stocks saw gains on Wall Street, but a weaker dollar impacted arbitrage spreads. Analysts at J.P. Morgan believe the most likely scenario is a political stalemate, which would necessitate the continuation of government operations under a continuing budget. This would limit new expenditures and potentially curb government debt issuance, offering short-term support for government bonds. However, delaying the 2027 budget and decisions on deficit and defense spending could raise risk premiums if the political deadlock persists.
A continuing budget allows the government to spend up to one-twelfth of the previous year's budget monthly, capping new budgetary expansions until a full budget is approved.
J.P. Morgan also outlined scenarios for a change in government, predicting a potential 2-3% strengthening of the shekel due to reduced institutional concerns and improved Western relations. In such a case, banks, insurance companies, and income-generating real estate firms sensitive to domestic activity might lead the market. Both leading candidates have pledged a tough stance against Hamas and Iran, with defense spending expected to remain high at around 8% of GDP.
Another scenario involves the continuation of the current governing bloc, which J.P. Morgan forecasts could lead to a weakening of the shekel by approximately 3% and an increase in bond yields and Credit Default Swap (CDS) rates. Defense and export companies might benefit from a devaluation, as it increases their shekel revenues. Foreign investors have already reduced their holdings of Israeli stocks to an all-time low, and further institutional risk could deter their return.
The most severe scenario combines a political outcome with a security escalation around the election vote. This is expected to trigger a sharper market reaction, including a flight to safe assets, currency devaluation, a jump in risk premiums, and declines in stocks dependent on domestic consumption. The current oil price, trading around $110-$115 per barrel of Brent crude, adds to inflationary risk.
