Data from prediction market Polymarket shows close to 60 per cent of betters are backing former military commander Gadi Eisenkot to become the next Israeli prime minister in Tuesday’s election, compared to 27 per cent for Prime Minister Benjamin Netanyahu.

Israel’s financial markets have made significant gains despite three years of war and domestic political turmoil. Yet some investors expect extra progress if the opposition defeats Netanyahu, potentially easing regional friction and political risk.

Meanwhile, opinion polls suggest a close contest, with neither Netanyahu’s ruling Likud party nor Eisenkot expected to secure the 61 seats needed for a majority in the 120-seat Knesset.

That points to the likelihood of prolonged coalition negotiations or another election, coming at a moment when the global artificial intelligence surge underpinning local markets has begun to falter. Since the October 7 Hamas attacks in 2023, the Tel Aviv stock exchange has surged 130 per cent, comfortably beating Wall Street’s 80 per cent advance, while the shekel has risen 25 per cent in one of the strongest currency performances worldwide.

Financial analysts attribute much of this growth to Israel’s tech sector and defence spending, which has nearly doubled to roughly 8 per cent of GDP. As both Netanyahu and Eisenkot pledge to maintain military pressure on Iran and Hamas, markets are weighing their broader policy divides. JPMorgan forecasts the shekel could fluctuate by as much as 3 per cent depending on the final result.

An opposition victory that improves relations with Western allies and halts a judicial overhaul that sparked mass protests in 2023 could strengthen the currency, JPMorgan said, while another Netanyahu-led government could weaken it. Billionaire investor Bill Ackman, while stopping short of backing a candidate, said a government without far-right ministers Itamar Ben-Gvir and Bezalel Smotrich would signal that Israel was “turning a new page,” potentially helping rebuild its international credibility and expand the Abraham Accords with its neighbours.

IBI Investment House also expects an opposition victory to lift the markets. “From a capital markets perspective, this would likely be reflected in a decline in Israel’s risk premium, appreciation pressure on the shekel, and a positive reaction in the local market,” IBI’s Chief Economist Rafi Gozlan said.

“The most significant issue is what the result will mean for the region,” said Equity Bank’s chief economic adviser Charlie Robertson. “If Netanyahu is reelected it might increase the chances of further escalation with Iran, whereas a defeat might be seen as lessening the tensions.” But the prospect of gains under an opposition government does not mean investors expect ‌Israeli assets to suffer if Netanyahu remains in power. Stocks and bonds have proved remarkably resilient through years of war and ‌political upheaval, and some investors remain confident in the economy regardless of the election outcome.

Union Investment’s Sergey Dergachev has been buying Israeli bonds ahead of the election, betting the economy and companies he favours will remain fundamentally strong. “We are very constructive on Israeli credits going into the election,” Dergachev said, adding that bonds were less prone to major swings and the region’s intertwined conflicts should eventually ease.

Risks remain

Tel Aviv shares were up around 1 per cent in the final session ahead of Tuesday’s vote, taking their year-to-date gain to about 12 per cent.

However, both they and the shekel have pulled back some 10 per cent since May. Analysts again point to the strong link to tech given global AI indexes have also been dropping, although there has been one nagging issue throughout the last three years. Despite the sharp stock market rally, Copley Fund Research data show that foreign investors have actually been edging away. The share of global funds holding Israeli equities is at now at record low 19 per cent, down from 34 per cent in 2023.

TS Lombard’s Christopher Granville cited central bank estimates that the war had cost the economy more than $55 billion by last year, equivalent to 8.6 per cent in cumulative lost GDP growth. Israel’s fiscal position is another focus. Public debt has risen to nearly 70 per cent of GDP, around 10 percentage points higher than in 2022, while the budget deficit is expected to remain around 4.5 per cent of GDP, versus less than 2 per cent before the conflict.

Central bank head Amir Yaron stressed last week the need to “preserve adequate fiscal policy space” given the Iran war.

Fundamental strengths

Like stocks, Israeli government bonds have rallied, returning about 30 per cent over the last two years, more than double the main emerging market indexes. The main risk for investors is an inconclusive result that prolongs political uncertainty, delaying budgets, reforms and investment, some investors believe.

That uncertainty can produce sharp short-term swings. Tel Aviv Stock Exchange research covering the last 10 elections found volatility in leading share indexes rose by as much as 45 per cent in the weeks after voting compared with a typical week. But initial losses were typically recovered within a month, with the indexes posting an average gain of about 1.7 per cent. Over a longer horizon, the TA-125 returned an average 16.4 per cent in the year following elections, compared with a long-term annual average of 11.5 per cent, ⁠the research found. Political deadlock often weighed on stocks before voting, but the effects typically faded within months, said Nissan Avraham, an analyst at the Tel Aviv Stock Exchange’s research unit.

That record supports the view that elections matter less for Israeli companies than many investors assume. Lior ‌Yochpaz, chief investment officer at insurance company Menora Mivtachim, said businesses ​have continued to thrive despite years of political upheaval, judicial overhaul proposals and regional conflict, helped by a ‌relatively business-friendly environment.

For some investors, however, the more attractive election trade lies outside Israel. TT International’s Jean-Charles Sambor said an opposition victory or weakened Netanyahu government could ease regional tensions and benefit Lebanese bonds. “The best way to play it for us is through other Middle East countries, and for us Lebanon is a good proxy,” Sambor said.