Israeli Stocks Plummet Amid Election Uncertainty, Real Estate Sector Hit Hardest

The Israeli stock market opened with sharp declines on Sunday, reacting to the inconclusive election results and the resulting uncertainty over the formation of a new government. Investment managers have consistently stated that uncertainty is the worst outcome for the stock exchange, a sentiment echoed by market participants on Sunday.

The Tel Aviv 35 index fell by nearly 3%, while the Tel Aviv 90 index, which is heavily weighted with real estate stocks, dropped by over 4%. Among the top 10 performing stocks in the Tel Aviv 125 index, eight were dual-listed companies, indicating their performance is more influenced by international markets than domestic ones.

The real estate sector experienced the most severe downturn, with the construction index falling over 7% and the Tel Aviv Real Estate 35 index dropping over 6%. The insurance sector also saw a significant decline of 6%, while infrastructure and banking indices lost over 3% and 5% respectively. Specific real estate companies like Israel Canada, Africa Israel Residences, Aura, Dori, Praskov, Azorim, and Amram Avraham saw substantial drops, as did income-producing real estate and data center companies such as Azrieli, Mega Or, and Melisron, which lost 5% of their value.

Insurance companies like Migdal, Clal, and Harel lost 6%, while The Phoenix and Menora declined by 4.5%. The significant weakness in these sectors is attributed to their high exposure to the local Israeli market. Investors are concerned about potential threats stemming from the political deadlock, including the inability to pass a state budget, which is crucial for sectors like real estate and infrastructure that are awaiting post-war growth. Additionally, there are fears of Israelis emigrating if election results are unsatisfactory, which would further reduce demand for real estate.

The uncertainty is also reflected in the Bank of Israel's recent interest rate decision, where it projected only one more rate cut in the coming year, explicitly excluding the election's impact. This suggests that the election outcome could influence future interest rate decisions, potentially delaying rate cuts and increasing financing costs for leveraged real estate companies. In response to the domestic uncertainty, investors are shifting towards dual-listed companies operating primarily abroad, which are experiencing much smaller declines. Cyber security firm Palo Alto Networks, chip companies Tower and Nova, and renewable energy firms Enlight and Ormat are among those seeing gains or minimal losses.

Eldad Tamir, CEO of Tamir Fishman Investment House, stated that investors inherently dislike uncertainty and that the current situation presents a worst-case scenario of political paralysis potentially leading to economic paralysis. Yossi Menashe, co-CEO of Altshuler Shaham Financial Services, noted that the foreign exchange market is currently directionless due to increased uncertainty, leading to higher volatility and risks. He anticipates this volatility will continue until more clarity emerges regarding the political situation.