Market optimism: Despite war uncertainty, Israeli stocks and shekel attract investors
Even as Gaza conflict continues into its 6th month, investors flock to buy local assets seen as cheap relative to those in global markets amid hopes for postwar recovery
Sharon Wrobel is a tech reporter for The Times of Israel.
Israel is more than five months into a costly war with the Hamas terror group, sparked by Hamas’s devastating October 7 onslaught, with no end in sight. Concern for an escalation of the fighting in the north is growing day by day, the economy has contracted, the fiscal deficit is ballooning, and Moody’s has downgraded the country’s credit rating.
Yet, stock and bond prices on the Tel Aviv Stock Exchange have been enjoying a recovery since late October, when the initial shock of the October 7 massacre in southern Israel and the first weeks of the consequent Gaza war receded. The shekel, which saw a remarkable comeback in recent weeks, hit a nine-month-high against the dollar in early March and is trading at stronger levels than on the eve of the Hamas-led onslaught on October 7.
“Markets tend to look forward — the local market is somewhat overly optimistic that the war will not escalate on the northern front with the Hezbollah, while there are talks in recent weeks of a [temporary] ceasefire in Gaza, including a hostage deal, supporting expectations that things will gradually return to some kind of relative normalcy,” Jonathan Katz, chief economist at Leader Capital Markets, told The Times of Israel. “Global stock markets have been moving higher, which is also pushing the shekel and the local stock market up.”
Despite the ongoing war, Israel’s leading stock indices — the TA-35 stock index of blue-chip companies and the TA-90, which tracks the shares with the highest capitalization not included in the TA-35 index — increased by about 6% each in February, similar to the trend in leading stock exchanges around the world.
In the US, the S&P 500 index was up more than 5% in February, taking its year-to-date return to almost 7%, and the Nasdaq rallied more than 6% last month. Meanwhile, in Israel, the benchmark TA-125 index and the TA-35 are up around 3% so far this year, and the TA-90 rose around 5% since the start of 2024.
Yaniv Pagot, head of trading at the Tel Aviv Stock Exchange, agreed that investors have in recent weeks become less pessimistic about an escalation of the fighting in the north and are cautiously optimistic that the worst of the economic fallout from the war could be over for now.
In recent years, Israeli shares and the shekel had a high correlation with the S&P 500 Index and global tech stocks, meaning that if the US stock index was up, the local market followed and the shekel gained, and vice versa.
The correlation was broken in early 2023 with the advancement of the Israeli government’s contentious judicial overhaul, which led to heightened political uncertainty and turmoil and deterred investors from putting their money into the local market.
As the outlook for further intense fighting during the ongoing war against Hamas diminishes, the Israeli market appears to be reverting to its correlation with global markets.
“Since the start of 2023, the Israeli stock market has been underperforming its global counterparts, which is creating opportunities for investors to buy local assets when the economy is expected to come out of the low point it experienced in the fourth quarter of 2023, and there are talks about a potential ceasefire and hostage deal,” said Bank Hapoalim chief strategist Modi Shafrir. “The market is partially pricing in that eventually when the war ends, Israel could find itself in a different political situation with a new leadership and with the contentious judicial overhaul off the table.”
Back in October, the shekel crossed the 4 per dollar threshold for the first time since 2015 and major stock indices plunged as Israel declared war on Hamas after thousands of terrorists burst into the country from the Gaza Strip by land, sea, and air on October 7, murdering some 1,200 people, and abducting another 253. Since then, the rebound of the shekel was helped by the Bank of Israel stepping in and selling $8.2 billion of foreign currency to stabilize the local financial market.
The war in Gaza took a heavy toll on Israel’s economy, which shrank an annual 19.4% in the last three months of 2023 from the previous quarter as consumer spending, trade, and investment were curtailed. The economy expanded 2% in 2023 after growing at a fast pace of 6.5% in 2022.
The outbreak of the war and the subsequent massive call-up by the IDF of some 300,000 reservists in October, led to the absence of 18% of the total workforce, according to Finance Ministry data. At the end of October, 139,000 employees were absent from work due to reserve duty, 346,000 due to the war situation with many residents displaced from their homes, and 280,000 due to other economic reasons. Although the figure has come down significantly in recent months as schools and other educational institutions reopened, there were still 112,000 reservists absent from work at the end of January out of a total of 180,000.
Since the start of the year, there have been signs that economic activity improved compared to the paralysis of October and November, which can be seen in the data for credit card purchases, foreign trade, and an increase in demand for employees in January, economists told The Times of Israel.
“The Israeli economy is showing first signs that it is coming out of a low point and is on the right track for a recovery, assuming that the fighting will be limited to Gaza,” said Gali Ingber, head of finance studies at the business faculty of the College of Management in Rishon Lezion. “Recent data shows that retail revenue and credit card purchases are on an upward trend and the unemployment rate is relatively low.”
“In the past, the Israeli economy has come out stronger from past wars and conflicts, which is also supporting investor sentiment in the Israeli financial markets,” Ingber added.
Not as optimistic, the Bank of Israel at the end of February opted to take a breather and leave borrowing costs unchanged after January’s bold rate cut, citing great uncertainty about the impact of the ongoing war with Hamas in Gaza.
In the minutes of the rate decision published on Monday, the central bank noted that “economic activity indicators show a gradual improvement in activity… market volatility moderated and financial markets are operating properly.”
However, the “level of uncertainty regarding the expected scope and duration of the fighting is very high, and this impacts as well on the extent of the adverse impact on activity,” the minutes read.
As Israel needs to raise more funds to finance the sharp increase in defense and civilian spending during the ongoing war, Moody’s in early February lowered its credit rating by one notch from A1 to A2 and said it expects the country’s “debt burden will be materially higher than projected.”
The decision had been widely expected, but the rating agency’s move to also lower its outlook to “negative” came as something of a surprise, raising red flags about confidence in the government to keep the economy afloat as it takes on more and more debt to pay for the war. The war-related spending changes put Israel’s deficit target at 6.6% of national output for 2024, the second largest deficit in the Western world after the US.
“Even if the other international rating agencies, such as S&P and Fitch, follow Moody’s and cut their ratings for Israel, that is not expected to be a surprise and cause any significant movement in the shekel-dollar exchange rate or the stock market, assuming that economic parameters continue to recover and the war remains contained,” said Katz.
