To Each Its Own Gaza

The reception for Israel's new defense minister, Ehud Barak, was Hamas' final conquest of Gaza, plus a smattering of deja vu: rockets fired at northern Israel from Lebanon. Yet the mood in the Israeli equity market remained upbeat.

Are investors simply ignoring the security situation? No: they are simply looking at developments from a narrow economic perspective. From that viewpoint, developments in the world markets and Israel's macroeconomic fundamentals matter more than this or that upheaval in Gaza.

Two weeks ago, the price of fixed-income Shahar bonds plummeted and the shekel started to weaken against the dollar. Share prices also started to lose ground.

None of this was because of local gunfire: the local downturn was caused by rising fears of inflation in America. When the concern abated, the local market began to rebound and the shekel soared anew.

For the perspective of investors, low interest rates are better than peace in Gaza.

More interesting is the long-term trend, and that supports share prices.

Locally - Israel's macroeconomic fundamentals continue to demonstrate strength. The economy is growing, fueled by private consumption and investment.

Change in the public's behavior also supports stocks and within a few years, pension funds will stop receiving designated bonds from the treasury and will be buying financial assets in the marketplace. Israelis typically own less stocks than residents of other countries do and savers are starting to move money from saving accounts and deposits, to the capital market.

But the real impetus behind the climbing asset prices in Tel Aviv, is not local factors at all, it's the gains in the rest of the world. Almost all stock markets rose dramatically in the last year. When assets in Germany, China, Italy, Argentina and Egypt are rising, Israel's do too.

Does Gaza pose any danger to Israeli share prices? Of course it does, and peace with the Palestinians could portend beautiful things for the economy. But inflation and interest rates in the U.S. are much more frightening to foreign investors.

Each country has its own Gaza. As long as Israel's interest rate environment and the risk perception among investors don't change, foreign investment will continue.