Investors Expect Shekel to Strengthen if Netanyahu Loses Election

Financial institutions predict that a victory for the opposition bloc in Tuesday's Israeli election would trigger a measurable rise in the value of the shekel. JPMorgan estimates the currency could appreciate by as much as 3% if Prime Minister Benjamin Netanyahu fails to retain power. This projection relies on the assumption that an opposition government would reduce political risk and improve relations with Western allies.

The Tel Aviv stock market has already surged 130% since the Hamas attacks in October 2023, outpacing the 80% gain seen on Wall Street during the same period. The shekel has climbed 25%, ranking among the world's strongest performers. Analysts attribute this strength to Israel's technology sector and a global boom in artificial intelligence. Defense spending, which has nearly doubled to approximately 8% of GDP, has also contributed to economic resilience.

Opinion polls indicate a tight contest, with neither the Likud bloc nor the opposition alliance led by former military chief Gadi Eisenkot projected to secure the 61 seats required to form a government in the 120-seat Knesset. This scenario raises the possibility of prolonged coalition negotiations or a repeat election. Both Netanyahu and Eisenkot have pledged to maintain pressure on Hamas and Iran, shifting market focus to broader policy differences rather than military strategy.

Investors view the potential removal of far-right ministers Itamar Ben-Gvir and Bezalel Smotrich as a signal that Israel is turning a new page. Bill Ackman, a billionaire investor, stated that such a government would help rebuild international credibility and expand the Abraham Accords. Rafi Gozlan, chief economist at IBI Investment House, noted that an opposition win would likely decrease Israel's risk premium and create appreciation pressure on the shekel.

Charlie Robertson, chief economic adviser at Equity Bank, emphasized that the regional impact is the primary concern. He stated that a Netanyahu reelection might increase the chances of further escalation with Iran, whereas a defeat could lessen tensions. Conversely, Union Investment's Sergey Dergachev remains constructive on Israeli credits regardless of the outcome, betting on the fundamental strength of the economy and favored companies.

Despite the market rally, foreign investors remain cautious. Data from Copley Fund Research shows that the share of global funds holding Israeli equities is at a record low, having fallen sharply since 2023. Christopher Granville of TS Lombard cited central bank estimates that the war cost the economy more than $55 billion by last year, equating to 8.6% in cumulative lost GDP growth. Public debt has risen to nearly 70% of GDP, about 10 percentage points higher than in 2022.

The budget deficit is expected to remain around 4.5% of GDP, up from less than 2% before the conflict. Central bank head Amir Yaron stressed last week the need to preserve adequate fiscal policy space given the ongoing Iran war. Israeli government bonds have returned about 30% over the last two years, more than double the main emerging market indexes. Nissan Avraham, an analyst at the Tel Aviv Stock Exchange, noted that volatility in leading share indexes rose by as much as 45% in the weeks after voting in past elections, but initial losses were typically recovered within a month.

Long-term data supports the view that elections matter less for companies than assumed. The TA-125 returned an average of 16.4% in the year following elections, compared with a long-term annual average of 11.5%. Lior Yochpaz, chief investment officer at Menora Mivtachim, said businesses have continued to thrive despite political upheaval and regional conflict. For some investors, the more attractive trade lies outside Israel, with TT International's Jean-Charles Sambor suggesting that an opposition victory could benefit Lebanese bonds by easing regional tensions.