Cease-fire calms market - for now

Analysts caution ramifications and political implications of war left much room for uncertainty.

By SHARON WROBEL
August 15, 2006 08:32
3 minute read.
business north 88 298

business north 88 298. (photo credit: Ariel Jerozolimski)

 
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Although the stock market breathed a sigh of relief on news of a cease-fire, analysts were quick to caution that the ramifications and political implications of the situation left much room for uncertainty. "With a cease-fire now in place, the shooting on the battlefield has stopped, but in the political arena the war has just begun," said Lenny Kushner, analyst at Clal Finance Batucha. "There is a lot of criticism about the handling of this campaign, which we believe will severely impact the government's clout in implementing new policies and driving through the budget." Haim Israel, research analyst at Merrill Lynch, meanwhile, noted that although the international community was pressuring both sides to maintain the cease-fire and enter into diplomatic negotiations, there was a risk that things would not run smoothly. If the agreement does hold, it would be a different story. "This would likely mean no deviation from the long-term trends in the Israeli economy, which indicate continued robust growth, an improvement in investment and inflation within the target range for price stability," Israel said. The Tel Aviv Stock Exchange opened the week with strong gains as the UN cease-fire agreement was approved by the Israeli and Lebanese governments. On the first day of the cease-fire, however, the benchmark Tel Aviv-25 Index was unchanged after rising nearly 3 percent on Sunday - its biggest one-day gain in four weeks. "In the market today, there is a wait and see attitude," said Richard Gussow, senior analyst at Excellence Nessuah. "There is slight skepticism on how the cease-fire will progress, while domestic criticism over the handling of the conflict adds more uncertainty in the market." On a more positive note, research analysts at Israel Brokerage and Investments Ltd. said past experience has shown that the conflict areas could now benefit from a period of economic flourishing. "The government invests much into the rehabilitation of the damages caused: buildings which collapsed will be rebuilt, opportunities arise to invest in better national infrastructures such as road building, while businesses will be investing into their businesses in anticipation of a rosier future." As the cease-fire came into effect Monday morning after 33 days of fighting, the Manufacturers Association of Israel estimated the cost to the economy as a whole at 1.9% of gross domestic product, or NIS 11.5 billion. Shraga Brosh, president of the association, said, however, that industrial output over the next few months was expected to cut the cost by 0.8% to 1.1%. Financial damage to industry and factories in the North has come to NIS 4.6b. since the beginning of the conflict, although the calculation by the manufacturers did not take into account indirect damage caused by loss of potential orders or customers, and damage caused to factories by missile attacks, which will be covered by insurance companies and property tax. In a letter to Finance Minister Avraham Hirchson, Brosh put together a number of crucial recommendations, which he said would help support a swift recovery of businesses and industry in the North. He demanded a six-month exemption from municipal tax for the business sector in the North; a one-year 13% tax credit for residents; an increase to 30% from 24% in investment grants to the North for one year; and an increase in support for R&D activity in the north to 75%. As a result of the start of renovation and repair work on buildings and infrastructures that were damaged during the war, Brosh expects rapid growth in the building sector. Similarly, demand is poised to rise in the building products industry, which will supply materials for repairs, and in the military industry due to an increase in the procurement of defense-related equipment. Furthermore, industrial factories are likely to see increased activity as shifts will be added to meet production deadlines. The release of purchases of products that were postponed by the war, is expected to boost activity in the commerce and services sectors

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