Investors See Potential for Further Israeli Market Gains if Opposition Wins

Some investors believe a defeat for Prime Minister Benjamin Netanyahu in Tuesday’s election could give Israeli markets another lift after strong gains through three years of war and political turmoil. Their expectations rest on the possibility that an opposition government would improve foreign relations and reduce political risk, although polls suggest neither side will secure a governing majority.

Neither Netanyahu’s Likud bloc nor the opposition alliance centered on former military chief Gadi Eisenkot is expected to win the 61 seats required in the 120-seat Knesset. That could lead to extended coalition talks or another election. Both leaders have pledged to keep pressure on Hamas and Iran, leaving investors to weigh differences in their wider policy agendas.

Since the October 7 Hamas attacks in 2023, Tel Aviv stocks have risen 130%, compared with an 80% advance on Wall Street, while the shekel has gained 25%. Analysts link part of the rally to Israel’s technology industry and the worldwide artificial intelligence boom. Defense spending, which has almost doubled to roughly 8% of GDP, has also supported the economy.

JPMorgan estimates that the election outcome could move the shekel by as much as 3%. It said an opposition administration that strengthens ties with Western allies and stops the judicial overhaul that triggered mass protests in 2023 could bolster the currency. Another Netanyahu government could weaken it. IBI Investment House chief economist Rafi Gozlan also expects an opposition win to lower Israel’s risk premium and support its currency and stocks.

Billionaire investor Bill Ackman did not endorse a candidate but said excluding far-right ministers Itamar Ben-Gvir and Bezalel Smotrich from government could help restore Israel’s international credibility and expand the Abraham Accords. Equity Bank chief economic adviser Charlie Robertson said Netanyahu’s reelection might raise the likelihood of further escalation with Iran, while his defeat could be interpreted as easing tensions.

Other investors remain positive regardless of the result. Union Investment’s Sergey Dergachev has purchased Israeli bonds before the vote, citing confidence in the economy and selected companies. Government bonds have returned around 30% over two years, more than twice the performance of the main emerging market indexes. However, Copley Fund Research says the proportion of global funds owning Israeli equities has dropped sharply since 2023 to a record low.

The economic costs of conflict remain substantial. TS Lombard’s Christopher Granville pointed to central bank estimates putting the war’s cost above $55 billion by 2025, equivalent to 8.6% in cumulative lost GDP growth. Public debt is approaching 70% of GDP, roughly 10 percentage points above its 2022 level. The budget deficit is expected to stay near 4.5%, compared with less than 2% before the conflict.

Some investors view an unresolved election as the biggest threat because it could delay budgets, reforms and investment. Tel Aviv Stock Exchange research on the past 10 elections found that leading index volatility increased by up to 45% in the weeks after voting. Initial declines were generally reversed within a month. The TA-125 averaged a 16.4% return in the year after elections, exceeding its long-term annual average of 11.5%.

Menora Mivtachim chief investment officer Lior Yochpaz said companies have continued to prosper through political and regional upheaval, supported by a relatively business-friendly environment. TT International’s Jean-Charles Sambor sees opportunities beyond Israel: he said an opposition victory or a weaker Netanyahu government could reduce regional tensions and benefit Lebanese bonds.