The outcome of Israel's election, set to take place on Tuesday, may have far-reaching implications for global markets, according to Nigel Green, CEO of deVere Group. A deadlocked result would likely unsettle investors worldwide, given the uncertainty it would bring. With neither Benjamin Netanyahu's bloc nor the opposition led by Gadi Eisenkot expected to win the 61 seats needed to form a government, the possibility of a stalemate is high.
Israel's current situation is precarious, with polls suggesting a hung Knesset. This could lead to months of coalition negotiations or even another election. In the meantime, a caretaker prime minister would still have the authority to order new strikes on Iran, which could drive energy prices higher and revive inflation. The stakes are high, with Israeli assets having climbed sharply despite years of conflict.
Since October 2023, shares in Tel Aviv have risen about 130%, far outpacing Wall Street, while the shekel has gained roughly 25% – one of the strongest currency performances worldwide. However, rallies built on this kind of backdrop can turn quickly. Both stocks and the shekel have already fallen around 10% since May, and analysts estimate the shekel could move by as much as 3% in response to the election result.
An Eisenkot victory would likely be welcomed by investors, who may interpret it as a sign of reduced political risk and a better chance of more stable relations with Israel's neighbours. On the other hand, a Netanyahu win would be less of a surprise, as markets already know what to expect from him. The main differences between the two leaders would be in their tone, diplomatic approach, and willingness to escalate.
Energy is an area where the election's effects could reach far beyond Israel. A new strike on Iran could drive energy prices higher, revive inflation, and push up government borrowing costs – just as bond markets are already under pressure. Even someone who has never owned an Israeli share is exposed through oil, according to Green.
Israel's public finances are another concern, with defence spending close to 8% of GDP, the highest proportion among Western economies. Netanyahu supports a 450 billion shekel military buildup over 12 years, while Eisenkot has called for structural reforms, including bringing more ultra-Orthodox Israelis into military service and the workforce. Bond investors care deeply about who will pay for these commitments.
The consequences of the election could spread across the Middle East, with some investors believing a weakened Netanyahu government might ease regional tensions and support assets such as Lebanese bonds. A change in Israeli leadership could also revive discussions about normalising relations with Gulf states. International investors remain cautious, with foreign ownership of Israeli equities at a record low despite the market's strong gains.
Key points
- A deadlocked result in Israel's election would be the outcome most likely to unsettle investors worldwide.
- An Eisenkot victory would likely be welcomed by investors, who may interpret it as a sign of reduced political risk.
- The election's effects could reach far beyond Israel, particularly in the energy sector.
