The dissolution of the Knesset and the beginning of the fourth election season in two years should have elicited some kind of reaction from the financial markets. But it hasn’t. The Israeli market has responded as if political stability is someone else’s problem.
In the week after the Knesset was dispersed automatically after the deadline for passing the state budget for 2020 and 2021 expired, the Tel Aviv Stock Exchange’s TA-25 index rose 5%. Was it a sign of how little the market thought of the current government? The TASE responded with the same indifference to the collapse of Kahol Lavan, the launch of a gaggle of new parties and the prospect of weeks of poisonous politicking from the campaigns. It’s all one big yawn.
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The market is looking the other way because it has other things on its mind.
First, it was the week the coronavirus vaccine drive got under way. It has since moved at an astonishing rate; a million Israelis have already received the first of two doses of the vaccine. The program’s success will restore normalcy to the economy, and for the capital markets that is far more important than the question of who will be the next finance or economy minister, or how many Knesset seats each bloc will win. The vaccine may even be more important than the identity of the next prime minister.
All the economic forecasts see 2021 as the year of recovery and revived activity for the sectors that were brought down by COVID-19 in Israel and the world, even if small businesses continue to struggle or fail in the pandemic aftermath.
Second, the pandemic caused governments and central banks to introduce unprecedented expansionary fiscal and monetary policies. Grants, loans, the extension of unemployment benefits, liquidity for the banks and above all an acknowledgment that low interest rates will be with us for some time to come.
The expectation of a rapid economic recovery as a result of the vaccine and guaranteed low interest rates for the foreseeable future has given the market the confidence to go higher. Economic factors outweigh the collapse of the government, another election, the recent rise in infection rates and the prime minister’s legal woes.
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The only reason for the upcoming election is Prime Minister Benjamin Netanyahu’s criminal trial in three cases. That’s also why the Knesset hasn’t been able to approve a state budget or to legislate economic reforms. A large number of decisions about the future are in freeze-frame for exactly the same reason.
But the tremendous upheaval the world has experienced as a result of the pandemic has forced Israelis to put other things into proportion. It’s enough that the fires are being put out – that the health care system is treating the sick, the vaccine drive is under way, the unemployed and failing businesses are getting help. The markets aren’t going to judge the politicians too harshly. Investors are giving them time and are not willing to punish them for their failures.
It could even be that the markets are glad to see another election. The national unity government was a failure whose only purpose was to handle the pandemic.
“Everything connected with the uncertainty created by the new election, we believe is less threatening than what had preceded them,” writes Michal Alshech, head of research at Discount Brokerage in a note published over the weekend. “Elections could lead to a government capable of advancing the budget and reform, which would support the economy and the markets.”
In other words, according to Alshech, the current government did nothing and we have no cause to mourn it.
Just two weeks ago, Alex Zabezhinsky, Meitav Dash’s chief economist, had been warning about the devastating effects of a fourth election. But now he’s taking the other view. “Elections are preferable to the status quo. They offer a chance of a government being formed that will pass a budget and needed reforms,” he wrote over the weekend.
Still, he is not sanguine about the future. The Knesset vote allowing the government to spend in 2021 according to the lines of 2020 spending (an official 2020 budget was never approved) was the least bad of all the options, Zabezhinsky said. The delay in approving a 2021 budget and the uncertainty could delay the economy’s recovery, he warns.
Just because the current government was such an abject failure does not mean the election will yield a coalition, much less a working one. But the changes under way in the political map have created different scenarios than preceded the three last elections – one of a decisive majority for the right and another of a decisive majority for the anti-Netanyahu camp.
According to the latest pools, both scenarios are possible. Despite his promises to the contrary, Gideon Saar’s New Hope party may join a right-Haredi coalition led by Netanyahu or there may be enough parties to form a government without a Likud led by Netanyahu. That means that the stalemate that characterized the previous three elections may now be broken.
Unlike TV talk shows and social media, financial markets respond to data, not to emotions. The data show that if you eliminate all the political noise, there are several reasons to believe that this year will be better whatever the composition of the next government. The vaccine, the fact that the current lockdown is likely to be the last, low interest rates, expansionary policies and expectations that consumers will spend freely once freed from pandemic captivity.
That said, the next government isn’t likely to be formed until May and will take a few more months for it to gets it bearings and introduce new programs. That means 2021 won’t be a recovery year, because the government will be undertaking long-awaited measures. But what if the other half of the recovery story – the success of the vaccines – doesn’t play out the way everyone hopes?