Whether Buji or Bibi win, markets expect little change

Kahlon’s probable role as finance minister, however, worries banks

March 16, 2015 19:15
3 minute read.

Shekel money bills. (photo credit: REUTERS)

Israel’s financial markets are unlikely to react dramatically whether Prime Minister Benjamin Netanyahu or opposition leader Isaac Herzog form the next government, according to financial experts.

While some elections are a fight between reformists and vested business interests, unions and corporations, welfare and inequality, experts largely see Tuesday’s election as a reaffirmation of the status quo, with tweaks around the edges.

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“There might be a change in the leadership but there’s not going to be a big change in the policy of the Israeli government, so I don’t think investors will get scared on the one hand or get very optimistic on the other hand,” Ori Greenfeld, chief economist and strategist at Psagot Investment House, said in an interview with TLV1 radio.

One reason for that is Israel’s electoral system, which requires coalition building in order to govern.

Even if there is a new prime minister, there are likely to be many of the same faces in the government, one way or another.

“One way or another, I think we probably aren’t going to see a major change in the business environment in Israel. There could be some differences, but nothing that would be a game changer in my opinion,” said Roni Biron, an Israeli analyst at UBS.

For all their self-professed differences, the major parties have all talked about lowering the cost of living, clearing bureaucracy, introducing competition or pointed regulation. While the Likud could keep shrinking the government and the Zionist Union could increase civilian spending, drastic differences are not expected.

“I think the markets didn’t give great weight to the results of the election, which means they essentially believe there will be a continuation of the status quo – what was will be,” said IBI Investments chief economist Rafael Gozlan.

The one notable exception is the Kahlon factor. Kulanu leader Moshe Kahlon, whose centrist party could decide who rules the next coalition, has his sights set on the Finance Ministry, where he has promised to lead reforms in the housing market and, more significantly for investors, the banking sector.

“Whether we have a government led by Herzog or Netanyahu, Kahlon will likely be in it and push the government toward a lower cost of living,” said Idan Azoulay, chief investment manager at Epsilon.

Netanyahu has already publicly offered Kahlon the ministry, and Herzog may have to reciprocate if he wants Kahlon’s support following the election. When Netanyahu made his offer, bank shares dropped in value.

“Moshe Kahlon as finance minister has obviously stated an ambition to increase competition in banks, which may hurt profitability, so that’s not going to be great news for the banks, and same goes for real estate, though there are fewer large publicly traded real estate companies,” said UBS’s Biron.

Putting the Kahlon factor aside, analysts admit that Israel’s unpredictable election could spur a few surprises that could rile or sooth investors.

“If there’s a government with the ultra-Orthodox there could be pressure to increase allotments, which could mean that you have to deal with budgetary issues again,” noted Azoulay.

Another factor that investors will be watching out for is how stable the next coalition looks.

“The biggest concern, and it doesn’t matter who forms the government, is whether the government is formed of many parties,” said Shmuel Ben Arie, head of research at Pioneer Wealth Management.

The more small parties that require appeasement to sit in a coalition, the more power they have to break it apart down the line, he said. Less stability means less long-term planning, a return to the automatic monthly budget that comes from failure to pass a new one, more regulatory uncertainty, and less progress in reforms.

“What the market wants to see is a unity government, which will mean the fewest number of parties,” Ben Arie said. “If there will be a situation that the big parties can reach 50 seats and then they need just one more party, then the financial markets will feel much better that there will be stability.”

Gozlan believes there could also be a “peace dividend” if the Zionist Union leads the government, which could increase the international perception that Israel is more serious about a diplomatic track.

“If it’s a left-center coalition, then there’s a more positive element for the market because of the diplomatic track, which will lower the concerns of sanctions from Europe,” he said.

Still, he added, “It’s less about Left and Right and more about getting things done.”

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