Israel Stock Market Swoons as Netanyahu, Economists Downplay Brexit's Impact

Tel Aviv Stock Exchange shares fall 3.2% as Netanyahu, Kahlon say Israel well-positioned to weather fallout from British vote.

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Prime Minister Benjamin Netanyahu attends the weekly cabinet meeting in Jerusalem June 26, 2016.
Not all the ministers in Israel's cabinet - not to mention their aides - are fully qualified for their roles. Credit: Dan Balilty, Reuters

Shares on the Tel Aviv Stock Exchange tumbled on Sunday in a delayed reaction to the Brexit vote even as Prime Minister Benjamin Netanyahu and a host of economists said the impact on the Israeli economy would be minimal.

The TASE used its circuit-breaker mechanism to briefly delay trade at the opening, but the benchmark TA-25 index still ended down 3.2% at 1,387.20 points. Trading was heavy for a Sunday, when foreign investors are inactive, with 1.05 billion shekels ($270 million) in shares changing hands.

There was no currency trading on Sunday, but on Friday the pound dropped 6.2% against the shekel to 5.432 while the euro lost nearly 0.8% to 4.3187 while the dollar strengthened 1.67% to 3.8850.

Israeli leaders sought to radiate calm and their assurances were backed up by most economists.

"There is no direct effect on Israel apart from the fact that we are part of the global economy," Netanyahu said at the opening of the weekly cabinet meeting on Sunday after consultations over the weekend with the treasury, Bank of Israel and National Economic Council.

"The Israeli economy is strong. It has very considerable foreign currency reserves; therefore, to the extent that there is some effect, it is not expected to be strong, other than unrest in the global economy," the prime minster said.

Finance Minister Moshe Kahlon also sought to assure Israelis, citing last week’s news of record low unemployment as well as the government small budget deficit and low debt levels relative to other developed countries.

“We have a strong and stable economy and are prepared to cope with every scenario and challenge,” he said, adding, however, that the treasury had set up a situation room to monitor the situation.

Although Israeli economic growth has been slowing, weighed down by falling exports, unemployment fell to its lowest in 33 years last month. Israel's current account was in surplus to the tune of $3.3 billion in the first quarter and a surge of tax collections have lowered the budget deficit to just 2.1% of gross domestic products - all factors that should aid the Israeli economy against any headwinds from a global slowdown.

In the stock market, however, investors ignored the assurances. Bank shares suffered the brunt of Friday’s global rout and were down 4% by close. Bank Hapoalim, Israel’s biggest, ended down 4.3% at 19.05 and No. 5 First International Bank of Israel lost 4.7% to 19.05 shekels ($4.95). 

Of the stock exchange’s top 100 stocks represented in the TA-100 index, only two -  the U.S. biotech company Mannkind and energy company Ratio (see story on this page) – finished the day higher. 

Mutual fund investors bailed out of the market, which accounted for a lot of the unusually high turnover. "We registered redemptions of 500 million to 800 million shekels," said one fund manager who asked not to be named. "But we're not talking about a panic on the scale of 2008," he added, referring to the global financial crisis.

As happened elsewhere in the world on Friday, investors sought safety in government bonds, which registered big gains. The treasury's 10-year Shahar bond jump 0.86% to cut its yields to 1.86%. For the Shahar due in 2042, prices jumped 1.7% to a yield of 2.77%.

The TASE had been closed Friday when other global stock markets lost about $2 trillion in value after Brexit vote, while sterling suffered a record one-day plunge to a 31-year low and money poured into safe-haven gold and government bonds.

The move blindsided investors, who had expected Britain to vote to stay in the EU, and sparked sharp repricing across asset classes. Mainland European equity markets took the brunt of selling as investors feared the vote could destabilize the 28-member bloc by prompting more referendums.

Israel's quasi-governmental Export Institute said Israel exported some $4.7 billion in good and services to Britain last year, making it the country’s second-biggest market after the United States. But even if Britain slides into a recession, as many economists are predicting, Israeli exports are unlikely to be hurt because they are mainly for products with inelastic demand like medicine. 

On the other hand, the institute and other economists warned, that trade in general would be hurt by weaker European economies. 

“The weakness of the pound and the euro, as well as a certain slowdown in growth in Britain and the countries that trade with it, will hurt Israeli exports to Europe,” said Ofer Klein, chief economist at Harel Insurance & Finance. 

He said however, that weak economies would lower the price of oil and make European imports to Israel cheaper.

Tzahi Malah, CEO of the government's Israel Foreign Trade Risks Insurance Corporation, said he expected Israeli companies to delay singing new export contracts with European buyers until the situation becomes clearer. 

Avi Simhon, chairman of the Israel National Economic Council, told the prime minster he wasn't worried about the direct impact of Brexit on Israel. Simhon said it would weigh on global free trade to a limited degree only. 

Britain and the EU will take two years to negotiate an agreement on trade and commercial relations and only then – when the terms of the agreement are set --will there be any real impact. But Simhon said he doubted Britain would be hurt much by leaving the EU.

"The EU strengthens weak economies for among other reasons it prevents them adopting irresponsible policies. This doesn't apply to a strong economy like Britain's, whose leaders we can assume to know how to manage it wisely even without being subject to EU rules," he said.

Reuters contributed to this report