Double whammy: Judicial overhaul, Hamas war batter Israeli markets in 2023

Local stocks underperformed global stocks this year, and remain cheap relative to those in other markets, but any rebound in 2024 will depend on security and political stability

Sharon Wrobel is a tech reporter for The Times of Israel.

The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)
The Tel Aviv Stock Exchange, December 25, 2018. (Adam Shuldman/Flash90)

Israeli financial markets this year parted ways with global market trends, hit by the double whammy of a contentious judicial overhaul and the outbreak of war with the Hamas terror group.

Local stocks in 2023 underperformed main global share indices — which soared around 20 percent despite the high interest rate environment — while initial public offerings came to a halt and corporate capital and debt-raising slowed down, the Tel Aviv Stock Exchange said in its annual report released on Sunday.

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 with a similar move in the same direction and the shekel gained, and vice versa.

In 2023, the TA-35 stock index of blue-chip companies edged up a mere 1.4 percent, and the benchmark TA-125 index rose 1.8%, while the S&P 500 Index jumped almost 23% and the Nasdaq 100 shot up 51% during the same period.

At the beginning of the year, the local stock market was shadowed by growing political uncertainty around the government’s proposed judicial overhaul and fears that the planned changes to the legal system would threaten the independence of the judiciary and make business and investment less predictable.

Local stock indices in the first eight months of the year rose by about 2% to 3% compared with double-digit gains in US and European stock indices, the TASE said. Over the course of the year, total equity raised from the public plunged to about NIS 8.2 billion ($2.27 billion) from NIS 21.7 billion in 2022, while the average daily trading volume was down 12% year-on-year.

Tech workers march in Tel Aviv to protest against the government’s planned overhaul of the judicial system, January 31, 2023. (Tomer Neuberg/Flash90)Israel Assets Slump Most in World on Protests Over Judiciary

Amid the political uncertainty, the public in 2023 withdrew a massive NIS 30 billion from funds that invest in shares and bonds in Tel Aviv and poured NIS 20.5 billion into funds that invest in securities abroad and NIS 53 billion into money market funds, bourse data showed.

As the war erupted after some 3,000 Hamas terrorists crossed the Gaza border in a devastating attack on October 7 that killed over 1,200 people, mostly civilians, Israeli securities initially dropped, and the shekel plunged to the weakest level in more than a decade.

Israeli assets have recovered since late October even as the army responded with a military campaign aimed at destroying Hamas, removing it from control over Gaza, and releasing the approximately 240 hostages who were seized by terrorists and taken to Gaza. Since the Hamas onslaught on October 7, the TA-125 declined 0.7%, the bourse noted.

To finance the war costs, which are estimated at around NIS 200 billion, the Israeli government this year raised about NIS 85 billion from bond sales to the public – more than twice the amount of debt issuances in 2022.

As we approach 2024, Yanov Pagot, head of trading at the TASE said he was cautiously optimistic, noting that the relative underperformance of local securities, the removal of the risk that the judicial overhaul will be advanced with the end of the war, and expectations that interest rates in Israel will start to fall all present conditions that make the Israeli market attractive for investors.

“The starting point at the beginning of 2024 is favorable both in terms of stock market pricing and in terms of the future interest rate path,” said Pagot. “The local stock market is cheap, but closing the gaps vis-a-vis the world depends on the security situation and stabilization of the political reality.”

Israeli security and rescue forces at the scene where a rocket fired from the Gaza Strip by Palestinian terrorists hit and caused damage in Holon, December 11, 2023. (Avshalom Sassoni/Flash90)

With the war still raging and the fighting in Gaza far from over, there are still risks for investors and traders in Israeli assets, Pagot cautioned.

“Government debt will grow sharply assuming that the budget deficit in the Israeli economy will amount to 5-6% of gross domestic product next year, which means that the Finance Ministry will need to raise about NIS 200 billion in 2024 – more than two-thirds of the amount in all of 2023 and four times the amount in 2022,” said Pagot. “Adhering to fiscal responsibility will be key for the government to make sure that the sharp increase in the debt-to-GDP ratio do not negatively impact the cost of government borrowing.”

Ending on a hopeful note, Pagot pointed out that the establishment of a broad government following the end of the war would support the local market and would have “very positive consequences for Israel’s economy and the Israeli stock market.”

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