For the fourth time in two years, Israelis headed to the polls on Tuesday. The coronavirus pandemic and its consequences – 1 million unemployed, postponed mortgage payments, bailouts for businesses and households – didn’t really move investors in Tel Aviv.
Players on the local stock exchange have been impacted primarily by the state of the global economy and the trillions of dollars that central banks and governments around the world have pumped into their economies. Since the decision to dissolve the Knesset on March 23, 2020, the blue-chip Tel Aviv-35 Index and the broader Tel Aviv-125 Index have increased by about 8%, the Tel Aviv-90 of midcap stocks – a better reflection of Israel’s economy – has increased by 10%, the Banks-5 is up 16% and technology shares are up 7%.
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Israel’s local indexes haven’t outperformed their global counterparts during this period of political uncertainty over the past two years, during which Prime Minister Benjamin Netanyahu stayed on as prime minister despite the cloud of criminal indictments hanging over his head. Since December 26, 2018, the day Israel’s 20th Knesset voted to disband, the Tel Aviv-35 has gained 13%, the Tel Aviv-125 has gained 8%, bank shares are up 15%, technology shares are up 13%, and the Tel Aviv-90 is up 11%.
TheMarker asked economists and investment managers whether the latest election would ultimately impact the stock exchange, and how the market would respond should Netanyahu win and form a right-wing government, or if there is no clear winner and Israel heads to a fifth election, or alternately after 12 years of Netanyahu rule the opposition parties finally manage to unseat him.
“No scenario will impact the market,” declares Yotav Costika, chief economist at the More Investment House. “Israel has no local version of Elizabeth Warren who’s interested in far-reaching changes. Everyone’s economic opinions are the same. There’s no longer any meaning to political uncertainty in Israel. The market learned how to maneuver after so many election rounds.”
Gat Megiddo, chief investment officer at Psagot Provident Funds and Pensions, agrees. “Elections in Israel are a non-event. There’s no political dispute or worldview that would benefit a certain sector, and therefore neither this election nor earlier rounds drew a response from the markets. As far as investors are concerned, there’s no longer any difference between a third election and a fifth election. The market has become accustomed to another election campaign and another one and knows how to live with what it already knows.”
Yaniv Mashat, investment manager at the Bechora Consulting & Investment Services, is mostly afraid of a potential extreme-right government. “Should there be a fifth election, I’d leave my portfolio as it is, and not make any significant changes,” he says. “A transition government won’t dramatically change investment considerations. We’ve been in political uncertainty since 2019, and we got used to it. The market pricing is currently reflecting the possibility that Israel won’t manage to form a government, but isn’t pricing the possibility that Netanyahu manages to pull together an extreme, right-wing fascist government with 61 MKs, including the Likud, the ultra-Orthodox and Itamar Ben-Gvir. Should this happen, Israel’s risk premium may increase, the dollar will gain strength against the shekels, and I’d transfer 70-90% of my investments abroad.”
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Jonathan Katz, chief economist at Leader Capital Markets, speculates otherwise: “Netanyahu gained the reputation as Mr. Economy who made reforms, and foreign investors remember his good years. Therefore, even if he forms a stable coalition with Bennett and the ultra-Orthodox, stock prices will increase. However, a coalition dependent on the ultra-Orthodox could be a negative, because the political extortion will continue.”
Megiddo says that because Likud is expected to continue being the largest party, “I think we’ll get more of the same thing after the election, particularly because the bureaucrats are staying. Therefore, my main expectation is that the capital market won’t respond,” she says.
Yair Lapidot, co-CEO of the Yelin Lapidot Investment House, believes a fifth election is reason for concern. “Israel’s business sector, led by technology shares, is strong, but the chronic political instability and the chance of a fifth election are bad for the economy.”
Katz agrees that another election round would damage the economy. “Another round would be the most problematic for the market. We expect to see a volatile shekel exchange rate, and international rating agencies could downgrade Israel’s sovereign credit rating and give the country a negative outlook. After four election rounds, we could find ourselves in the situation Italy was in during the 1970s. As long as there was a coalition, there was certainty. When there’s no coalition, the government functions poorly, and given the state of the economy in the wake of the coronavirus pandemic, we could see the stock market and the shekel take a hit.”
Costika believes another election round could indeed have more of an impact. “Since we haven’t had a national budget in three years and the country is being managed from month to month, we’ll be paying for this in a few years. But currently the main factor impacting the capital market is the Bank of Israel, the U.S. Federal Reserve and Israeli technology companies.
“These companies are powering the economy right now and keeping it above water. The startups that went public via SPAC mergers at high valuations have reached a total market cap totaling $35 billion; the number of people who made it rich in the process and received options and cash is incredible. The stock launches create a lot of money and taxes for the government, and even though it’s not being properly managed, this compensates for the lack of management and gives Israel purchasing power; money is flowing to housing companies and growth companies, and this is the most significant part.”
“Therefore, as far as investors are concerned, even if there’s background noise from any given government, I wouldn’t redirect the ship, which is currently being powered by technology and innovation. None of the candidates is proposing a major economic aid package that would reduce the deficit.”
Megiddo agrees that Israel’s technology sector is playing a major role. “The coronavirus pandemic gave the technology sector a strong boost, and there’s a lot of money in Israel from these exits and from unicorns that merged with SPACs. These are companies with revenues and profits that are creating a lot of wealth for their founders and employees. A large number of people are doing well financially, and that will provide a lot of fuel for local economic growth. Just as we saw at the beginning of the pandemic a sharp economic downturn, now we’re seeing a strong push upward thanks to members of the middle-class who have been saving money. Sectors such as hospitality and commerce, which benefit from the rebound in consumption, will profit.”
And what if there’s a surprise and Netanyahu is ousted?
Mashat: “I’d increase my investments in Israel. Without Netanyahu and the ultra-Orthodox in power, there’s a larger chance that the local capital market will react positively, increasing sharply and outperforming global markets, after a period when it lagged behind them. This also depends on macroeconomic stats in the United States and around the world staying the same. If a government is set up without Netanyahu, sectors including residential real estate, banks, oil and gas companies, and IT could be interesting investment options.”
Katz: “Capital markets love certainty, so even if Netanyahu loses, it could be good for markets, if there’s a stable coalition without him. The problem is that it’s hard to make big reforms with the ultra-Orthodox parties, and it will be difficult to have a rotation with them.”