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As the returns on the Tel Aviv Stock Exchange continued to show declines since the Hamas victory, foreign investment houses have started to express their concerns that the Israeli market was likely to underperform due to heightened political uncertainty.
Deutsche Bank downgraded its rating for the local market to "underperform," counseling investors to underweight Israeli stocks in their international portfolios.
As a result, the leading Tel Aviv Stock Exchange indices, which rose more than one percent earlier in the day, declined by 1.1% at market close.
In its emerging markets report, Deutsche Bank expressed concerns about political uncertainty following the Hamas victory. Further the bank explained that, if the positive momentum in other emerging markets continued, they were likely to achieve higher returns than Israel's.
In a similar tone, UBS recommended a "neutral" stance on Israeli equities in a recent general review of worldwide markets. The investment bank affirmed Israel's rating weighed by political uncertainty arising from the election outcome in Israel, the victory of Hamas, and renewed threats from Iran.
Meanwhile, Standard & Poor's, in a more balanced outlook affirmed Israel's A- credit rating giving the country a stable outlook on the back of improved government finances and expected continuation of fiscal reforms and prudent economic polices by the next government.
S&P said political developments in the short-term would not impact Israel's sovereign creditworthiness, as political institutions in Israel were robust.
"Despite political upheavals, the economic reform agenda has proceeded apace and economic prospects remain solid, with GDP growth projected at 4.2% in 2006, and balance-of-payments pressures remaining negligible," the ratings agency stated in its report.
Against these strengths, S&P warned, however, that a significant deterioration of the security environment in the long term would put pressure on the credit ratings on Israel.
"A prolonged deterioration in the security environment could relegate economic reforms from the government's top priorities and damage Israel's economic growth prospects and potentially widening fiscal deficits," said S&P analyst Beatriz Merino. "Conversely, continued progress with the implementation of economic reforms and rapid debt reduction, supported by a stable security environment, could improve the ratings prospects for Israel."
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