The Ballot and the Stocks: Are Elections Good for an Investment Portfolio?

In three months, elections for the next Knesset will be held in Israel, which are again described by many as "especially fateful." The question of the connection between the ballot in the box and the return on an investment portfolio may not be perceived as central, but it interests many investors. They wonder how to prepare for the elections and which sectors and stocks might profit from them.

In the USA, for example, the consequences of the election campaign are seen on the stock market sharply and clearly. Thus, in 2024, the stock exchanges on Wall Street reacted positively and strongly even before the elections, as investors sensed the approaching victory of Donald Trump over Kamala Harris. As a result, the traditional energy sector soared, while renewable energy stocks were hit. But is what is true for the USA also true for us?

1. What history teaches in the stock market

At least historically, the stock exchange return (the TA-35 index) in the period after the elections is on average higher than in the period before them. A study by Prof. Yossi Yagil, an expert in finance and behavioral economics, found that in 18 election campaigns from 1955 to 2019, the average real return of the flagship index stood at 1.57% in the year before the elections, compared to 18.55% in the year after them.

"The lower average return before the elections can be attributed to the dissolution of the Knesset and the beginning of uncertainty," Prof. Yagil tells Globes. "The higher average return after the elections can be attributed to the actual end of coalition uncertainty and the swearing-in of the government. However, this is not a causal link, but merely a description of reality." Since 2019, due to a sequence of election campaigns and macro events, the trend has weakened: the real return in the year before the elections was 1.1% and in the year after them 14.4%.

2. "Political opinions are a recipe for loss"

While historical numbers point to a trend, some macro experts argue that it is better for investors to ignore the political background noise. Yinon Nir, head of the trading room at Bank of Jerusalem, presents a firm position: "Political opinions are an excellent recipe for losing money in the capital market. Financial markets price the future, and therefore they are more optimistic than the way most people experience reality. There is a tendency to attribute too much weight to the election results, instead of the interest rate trajectory of the world's central banks or the development of technology."

Amir Kahanovich, chief economist at Profit, agrees: "The elections themselves are devoid of importance, and the real impact comes only from the policy derived from them. The market is already pricing the expectations, which means there is no reason why the elections themselves should be a reason for market movement." Daniel Leitner, CEO of Tamir Fishman, adds: "The market is not looking for a specific government but for certainty."

3. Four scenarios for the local economy

Uncertainty regarding the election results in Israel is currently considered high. The market describes four different scenarios:

A narrow government in the format of the outgoing one.
A narrow opposition government.
A broad unity government.
A return to election rounds.

Eyal Shina, Chief Investment Officer of the Pasternak-Shaham investment house, argues that the lack of a decision and repeat elections is the worst scenario, as uncertainty is the capital market's biggest enemy. A broad unity government is, all experts agree, "the ideal scenario for investors," capable of giving a boost to banks, infrastructure, and residential real estate.

4. Where should you put your money?

Investment managers offer practical action strategies ahead of the trip to the polls. Haim Butnaro, manager of investment centers at Bank Leumi, recommends focusing on large and liquid companies: "We believe more in TA-125 companies and prefer not to be in small stocks in a period of uncertainty." He marks the renewable energy sector and the banking sector as positive investment targets, noting that banks are worthwhile for investment at their current levels.

Rami Dror, CEO of Value Advanced Investments, estimates that sectors like infrastructure, energy, defense industries, and finance are expected to thrive "in almost any result," as these are structural trends. "It is important to remember that even during the current government's period, despite the war, the Israeli economy demonstrated resilience, and the local stock market reached new highs," he summarizes.