Shares, government bonds slide as planned judiciary shakeup dampens investor mood

Concern over changes to the judicial system and investors pulling money out Israel puts focus on a potential weakening of the shekel, says Goldman Sachs

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

A stock market ticker screen in the lobby of the Tel Aviv Stock Exchange, March 9, 2020. (Avshalom Sassoni/Flash90)
A stock market ticker screen in the lobby of the Tel Aviv Stock Exchange, March 9, 2020. (Avshalom Sassoni/Flash90)

Shares in Israel dropped on Sunday and its currency weakened in recent days amid growing investor concern over the judicial overhaul proposed by its right-wing government and after a deadly Jerusalem attack killed seven civilians.

The Tel Aviv Stock Exchange’s benchmark TA-125 index closed 2.1% lower on Sunday, while the TA-35 index of blue-chip companies fell 2%, and longer-term government bond prices declined about 1%. That’s after shares on Wall Street on Friday closed a strong week with gains.

The shekel, which does not trade on Sunday, over the past two trading days weakened about 2% against a basket of currencies, including the US dollar.

The dampened mood of investors comes as Israeli bank chiefs on Friday warned Prime Minister Benjamin Netanyahu of potential economic fallout from his government’s proposals for a sweeping makeover of the country’s judiciary. He said he was open to dialogue but insisted that he will not slow efforts to advance the judicial overhaul.

Netanyahu met with the heads of several of Israel’s largest banks and other businesspeople, seeking to push back against a growing chorus of warnings from top business leaders and senior economists that investors are starting to move their funds out of the country.

While in recent years, Israeli markets have been strongly correlated to movements in the global markets and largely resistant to local political and security-related events, analysts at local and global investment houses are starting to caution that the planned judiciary changes are weighing on investor sentiment.

Economists at Bank Hapoalim and Leader Capital Markets said that the news that foreign investors are beginning to take their money out of Israel in response to the makeover of the judicial system led to a sharp drop in the prices of government bonds, share sale in the local market (also by foreign entities) and a considerable weakening of the shekel.

Israeli workers stage a one-hour strike against in Tel Aviv against government’s judicial overhaul plan. (Courtesy)

IBI Investment House Ltd. chief economist Rafi Gozlan noted a slight downshift in local market sentiment since the middle of last week deviating from the typical correlation with global markets, after Bank of Israel governor Amir Yaron warned Netanyahu that the ruling coalition’s plans to upend the judiciary could scare away investors and negatively impact the country’s credit rating.

Yaron met with Netanyahu last week after returning from the annual conference of the World Economic Forum in Davos, Switzerland, where he met with global central bank heads, ratings agencies, and senior business executives.

“The local market is trying to digest the proposed changes to the judiciary system which could increase the risk premium on domestic assets,” Gozlan told The Times of Israel. “Since the middle of last week we are seeing some slight repricing that has started with the shekel weakening and local government bond prices continuing to fall today amid investor jitters.”

US investment bank Goldman Sachs cautioned that the “growing concern over domestic political developments” puts a focus on the exposure of the shekel.

“The five most recent elections over the past three-year period have had typically limited read-through to financial markets,” Goldman Sachs economist Tadas Gedminas wrote in a report on Friday. “This is not to say that the current situation could not have a more meaningful impact this time around, and we will closely monitor ongoing developments.”

“That said, we think these structural changes and their implications for financial markets are underappreciated,” Gedminas warned.

Illustrative: Israeli 100 shekel banknotes, December 31, 2017. (Nati Shohat/Flash90)

Gedminas noted that during meetings held in Israel last week with policymakers, analysts and local market participants, the performance of the shekel was at the center of concern.

“There was a wide range of views on the direction of the shekel from here, with some market participants highlighting concerns over the fallout from increased domestic political uncertainty that is likely to weigh on sentiment and could leave the currency exposed,” Gedminas wrote. “Nevertheless, our impression was that the macroeconomic consequences of the main discussed negative risk scenarios (e.g., reduced FDI [foreign direct investment] inflows into Israel) would take years to materialize, rather than changing the fundamental macroeconomic picture in the near term.”

One Saturday, for the fourth time in a row, tens of thousands of anti-government demonstrators, including thousands of tech and business people, rallied in Tel Aviv to protest the new coalition’s far-reaching judicial shakeup plans. Saturday’s demonstration began with a minute of silence following the deadly terrorist attack in Jerusalem’s Neve Yaakov neighborhood, which killed seven people and wounded at least three others.

Protesters have been gathering weekly after Justice Minister Yariv Levin unveiled a controversial plan to overhaul the judiciary that would drastically limit the authority of the High Court of Justice to block legislation and government decisions deemed discriminatory and/or undemocratic, give the government control over judicial selection, and eliminate ministry legal advisers appointed by the attorney general.

Israeli companies, moneymakers, and business organizations have in recent weeks publicly voiced their concern that the judicial overhaul plan is poised to threaten democracy and harm the thriving local tech industry.

As investors are subject to increasing scrutiny in recent years as to how and where they invest, many fear that a weakening of the judiciary system will mean foreign investors may shy away from backing companies in the country. This in turn may force businesses to leave and set up shop elsewhere.

Israel’s largest foreign venture capital investors have also come out in support of the local tech industry’s protest. European VC Index Ventures, an investor in Israeli cybtertech company Wiz, last week joined New York-based investment and private equity firm Insight Partners in expressing its support of tech employees and entrepreneurs who “take to the streets to express their beliefs during this time of uncertainty.”

“It is so important for those within the global tech community to influence and speak out on these pressing issues,” Index Ventures said. “In order for businesses and individuals to thrive, we must uphold the right of equal opportunity for all.”

Gozlan emphasized that the proposed judicial changes are a “game changer” as they are going to turn Israel into a place with a much weaker judicial system of checks and balances and less protection for investors.

“Local tech workers and entrepreneurs may decide that they don’t want to continue to live in a country with an anti-liberal government which in turn will impact future growth and investment,” Gozlan said. “It is not so difficult to relocate Israel’s tech sector – knowledge is easy to transfer.”

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