The wave of terror attacks began more than a week ago, but at the Tel Aviv Stock Exchange it’s been business as usual so far.
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Whether it will stay that way depends on whether the violence and uncertainty continue or dissipate relatively quickly. The paradigms can be seen in how the market reacted to the last two military encounters Israel had with Hamas in the Gaza Strip versus its behavior during the second intifada.
In the 2008-2009 Cast Lead Operation, which lasted about three weeks, the TASE’s TA-100 index finished about 0.6% higher; five-and-half-year later, in the summer of 2014, the index rose 1.6% during the 50 days of fighting in Operation Protective Edge. By comparison, the index tumbled some 200 points during the first two years of the second intifada, spanning 200-2002.
The second intifada coincided with a sharp recession in Israel, prompted in part by the intifada but also by the bursting of the global tech bubble. But Cast Lead also occurred as the global economy was slipping into its worst economic downturn in 80 years.
On the surface, the market’s behavior seems counterintuitive. Share prices are supposed to reflect the state of the economy, which in turns affects the profits of publicly-traded companies. A big drop in consumer spending, as is happening now amid a wave of attacks on Israel’s streets, will certainly hurt sales and may even plunge Israel into a recession.
“The question is the intensity of the terror attacks in terms of lives, the portion of the population affected and how long the security situation remains tense,” said Ayelet Nir, chief economist at the Yetzirot investment house. “In Protective Edge, most of the public felt a sense of security, among other things thanks to Iron Dome. An intifada is another story; sliding into a third intifada will weigh on long-term economic activity because people will be hesitant to leave their homes.”
Shares prices fell sharply on Tuesday, but that was due at least as much to declines in Europe as to attacks that caused three deaths that day.
At a trading room at Bank of Jerusalem, the odd Tuesday was bearish and traders looked bored and distracted in front of their screen. “”The quiet isn’t a good sign. On a good day things are abuzz here,” said Meir Slater, the bank’s head of research.
But, on Wednesday, with violence having subsided, at least for now, shares prices recovered, with the benchmark TA-25 index ending 0.9% higher (see story on this page.) The index is up 0.4% this month.
Meanwhile, the shekel has been strengthening against the dollar, despite pulling back 0.8% on Tuesday in parallel with the stock market drop. On Wednesday, the dollar weakened 0.4% to 3.85 shekels.
“The Israeli market still hasn’t reacted to the terror attacks. Every day we see declines, but then the market corrects itself,” said Idan Azoulay of Epsilon Investment House on Tuesday, as the market was falling in response to the wave of attacks.
The current situation echoes the second intifada and Cast Lead in that the world economy is in a period of economic uncertainty. “There are question marks about the impact of a slowdown in the world economy on the U.S. economy, something which could affect us,” said Nir. “While we’re dealing with all these question marks, along comes the security element.”
But Azoulay expressed more bullishness about the current situation. “There’s no question that Israel is coming from a stronger place than it was at the start of 2000,” he said.
Those assets, explained Jerry Cutiesteanu, head of investments at IBI Israel Brokerage & Investments, include the fact that the government is running a much smaller budget deficit than it was 15 years ago and its foreign currency reserves are swelling.
“Israel can absorb shocks like this,” said Cutiesteanu. “Only something that continues for several weeks will really affect spending by the average Israeli, and even then it will only be temporary. For example, people will come back and buy houses and cars, so consumer spending won’t be harmed so quickly.”
In any case, many TASE companies, including the bluest of its blue chips, are little affected by what happens in Israel because they export and/or have operations abroad. “You have to remember that 40% of the TA-25 isn’t connected to Israel, so the likes of Teva Pharmaceuticals, Perrigo and Nice Systems won’t affected by declining consumer spending,” said Cutiesteanu.