A solid victory for Kadima would boost the Tel Aviv Stock Exchange and Israel's economic prestige, while a weaker Kadima susceptible to pressures to expand government spending would cause concern in the markets, analysts said Monday.
"A strong Labor, with a strong Amir Peretz in the Knesset, would lead to powerful demands for further public spending and looser fiscal control, and this would worry the market," especially if the Labor Party is strong enough to demand control of a government ministry with power over the economy, said Clal Finance Batucha trader Avi Weinreb. "The two basic questions are how big Kadima will be and how strong Labor will be," he said.
Leader Capital Markets analysts issued a report supporting the same conclusion. "The market is concerned by the possibility of a sharp rise in minimum wage or an increase in government spending," the statement said, in a reference to Labor's declared intention to raise the minimum wage to $1,000 per month.
"Continued fiscal reliability following the establishment of the new government is a fundamental condition for a positive trend in the stock market over the coming year," Leader analysts said, adding that an "overwhelming Kadima victory" of 35-40 mandates would allow it to retain control over the key government ministries (Defense, Foreign, and Finance), as the 40-mandate Likud victory in 2003 allowed that party to maintain solid control.
In such a scenario, government macro-economic and geo-political policy would most likely be characterized by continuity of trends that crystallized under Prime Minister Ariel Sharon, including fiscal restraint, continued reforms and privatizations, and reduced government intervention in the economy, Leader analysts predicted, adding that such continuity could help boost Israel's credit rating abroad to "Positive Watch" from "Neutral Watch."
While a win of 38-40 Knesset mandates for Kadima would meet with a positive market reaction, a win of 32 seats or less would lead to a negative reaction and a win of about 33-36 mandates would not provoke any significant reaction in the markets, Clal's Weinreb predicted.
"Even if Kadima wins less than 33, still the market will not lose so much value, unless there is a true surprise, such as Kadima winning less than 30 mandates or labor winning more than 24 or 25," he said.
Leader analysts said that disappointing results for Kadima (less than 35 mandates) would have a negative effect on the markets if they force the party into "horse trading" with other parties and making concessions that would expand the budget, thereby ending hopes of fiscal restraint.
Foreign investors would be further concerned by internal political inconsistencies resulting from a weaker Kadima win, they predicted.
Prof. Rafael Eldor, capital markets pundit at the Interdisciplinary Center in Herzliya, argued, however, that the elections would not have a significant influence on markets.
"Ultimately, reality forces whoever is in government to do what has to be done economically - and not always according to his party's platform," he said. "I'm optimistic."
Assuming that the election results are within the medium range of expectations, other events will have a greater influence on the market, Clal's Weinreb stressed.
Of particular interest, he said, would be the quarterly earnings results of Israel Chemicals, Bank Hapoalim and Bank Leumi, scheduled for release on Wednesday, and options expirations leading to an increased volume of market activity that morning. Furthermore, Thursday is the last day of the week, month and quarter, "and there are many elements in the market interested in ending the quarter positively," Weinreb said.