Israeli Stocks Rally 130% as Investors Weigh Election Outcome for Shekel

Israeli equities have climbed 130% since the October 7 Hamas attacks in 2023, a run that has drawn investor attention to Tuesday's Knesset vote and its potential effect on the shekel. Over the same period, Wall Street's main indexes advanced 80% and the shekel gained 25%. Defense spending has almost doubled to roughly 8% of GDP, and analysts link part of the rally to the technology sector and the global artificial intelligence boom.

Neither Prime Minister Benjamin Netanyahu's Likud bloc nor the opposition alliance led by former military chief Gadi Eisenkot is polling close to the 61 seats needed for a majority in the 120-seat Knesset. That arithmetic could produce extended coalition negotiations or another election. Both Netanyahu and Eisenkot have pledged to maintain pressure on Hamas and Iran.

JPMorgan put the potential shekel move at as much to as 3% depending on the result. The bank said an opposition administration that rebuilds ties with Western allies and halts the judicial overhaul that set off mass protests in 2023 would support the currency, while a renewed Netanyahu term could weaken it. Rafi Gozlan, chief economist at IBI Investment House, also expects an opposition win to lower Israel's risk premium and lift both the currency and stocks.

Billionaire investor Bill Ackman did not back a candidate but said keeping far-right ministers Itamar Ben-Gvir and Bezalel Smotrich out of government could help restore international credibility and expand the Abraham Accords. Charlie Robertson, chief economic adviser at Equity Bank, said a Netanyahu reelection could raise the odds of further escalation with Iran, while his defeat might read as easing tensions.

Some money managers are positioning for either outcome. Sergey Dergachev of Union Investment bought Israeli bonds before the vote, citing confidence in the economy and selected companies. Government bonds have returned about 30% over two years, more than double the main emerging market indexes. Copley Fund Research said the share of global funds holding Israeli equities has fallen sharply since 2023 to a record low.

The conflict's costs remain heavy. Christopher Granville of TS Lombard pointed to central bank estimates putting the war's price above $55 billion by 2025, or 8.6% in cumulative lost GDP growth. Public debt is nearing 70% of GDP, about 10 percentage points above its 2022 level, and the budget deficit is expected to stay near 4.5% versus less than 2% before the conflict.

Tel Aviv Stock Exchange research on the past 10 elections found that leading index volatility rose by up to 45% in the weeks after voting, with initial declines generally reversed within a month. The TA-125 returned an average 16.4% in the year after elections against a long-term annual average of 11.5%.

Lior Yochpaz, chief investment officer at Menora Mivtachim, said companies have kept operating through political and regional upheaval in a business-friendly environment. Jean-Charles Sambor of TT International said an opposition victory or a weaker Netanyahu government could reduce regional tensions and benefit Lebanese bonds. The election is Tuesday.