IBI Study Predicts Israeli Market Rally If Government Changes After Elections

Investment house IBI has published a comprehensive macro study analyzing how the upcoming Knesset elections will impact Israel's economy. In an unusual move, IBI analysts explicitly state that a scenario involving a change of government is expected to support a drop in the risk premium, a strengthening of the shekel, and a positive response in the stock market. Conversely, they warn that the continuation of the current coalition's structure could lead to an increased risk premium, depreciation of the shekel, and declines in the domestic market.

Until now, most capital market analysts and economists have limited themselves to vague assessments regarding the market implications of the election results. However, IBI chose to remove the ambiguity by deeply analyzing several potential scenarios: a change of government, the continuation of the current coalition, and intermediate scenarios marked by political instability.

Interest Rates and Real Estate Dynamics

The study also addresses the interest rate trajectory. According to IBI, a change of government could bring an additional interest rate cut to the table. In contrast, the survival of the current coalition could prompt a rate hike of 0.5% to 1%, the review notes. These monetary shifts are expected to broadly impact various sectors.

In the banking sector, IBI estimates that lower interest rates would shift the focus from interest margins to credit growth, efficiency, and capital management. In income-producing real estate, a lower risk premium could drive down capitalization rates and increase asset values, while easing companies' financing expenses. Meanwhile, exchange rates and tech sector activity will directly dictate demand for office space.

Elections may also affect the residential real estate sector through mortgage costs and transaction volumes. However, political instability and repeated election rounds would harm investments, particularly impacting infrastructure, renewable energy, oil, and gas, as decisions on new projects get postponed.

Deficit, Security Burden, and Emigration Pressures

Regarding the state budget, IBI notes that rising security burdens and lax fiscal discipline have pushed the debt-to-GDP ratio to roughly 70%, up from about 60% before the war, narrowing the economy's cushion against negative shocks. The trajectory of this ratio and the deficit will directly depend on the next government's tax policy, willingness to implement fiscal adjustments, and economic growth potential.

Furthermore, the analysts warn of another accelerating risk factor: the rise in emigration from Israel due to security conditions and government policy. While numbers are not yet massive, a continuation of the current government threatens to exacerbate the trend and gradually impair long-term growth potential.

The Alternative Scenarios: Change, Minority, or Caretaker Paralysis

Under a change-of-government scenario, IBI projects a positive market reaction, partly already priced in, reflecting a declining risk premium and renewed legitimacy from Western nations as a clean slate is established. Business sentiment and reform prospects would likely improve, bolstered by figures within the alternative bloc who possess senior public and private sector economic experience.

Conversely, a scenario featuring a deadlocked election and a lingering caretaker government is expected to trigger a negative market reaction. IBI attributes this to anticipated stagnation, continued pressure on state institutions, and the fact that current market pricing already factors in a high probability of political change.