Israel’s election deadlock could rattle global markets

A deadlocked result in Israel’s election would be the outcome most likely to unsettle investors worldwide, says Nigel Green, CEO of deVere Group, one of the world’s largest independent financial advisory firms.

Israelis vote on Tuesday in the country’s first election since the October 7 attacks and the start of the US-Israeli war with Iran. Polls suggest neither Benjamin Netanyahu’s bloc nor the opposition led by Gadi Eisenkot is on course to win the 61 seats needed to form a government.

“A stalemate is difficult because it leaves every major question unresolved at the same time,” Green says. “Markets tend to demand a higher premium for that kind of uncertainty.

“A hung Knesset could mean months of coalition negotiations, or even another election. Meanwhile, a caretaker prime minister would still have the authority to order new strikes on Iran.

“For anyone invested in oil, bonds or emerging markets, that’s the scenario to watch.”

The stakes are high. Israeli assets have climbed sharply despite years of conflict. Since October 2023, shares in Tel Aviv have risen about 130%, far outpacing Wall Street, while the shekel has gained roughly 25% – one of the strongest currency performances worldwide.

“Israeli markets have weathered three years of war, supported by technology, artificial intelligence and heavy defence spending,” Green says. “But rallies built on that kind of backdrop can turn quickly. Both stocks and the shekel have already fallen around 10% since May.”

Analysts estimate the shekel could move by as much as 3% in response to the election result.

An Eisenkot victory would likely be welcomed by investors, Green says. Markets could interpret it as a sign of reduced political risk and a better chance of more stable relations with Israel’s neighbours. A Netanyahu win, by contrast, would be less of a surprise.

“Markets already know what they’re getting with Netanyahu,” he says.

Energy is where the election’s effects could reach far beyond Israel. “Even someone who has never owned an Israeli share is exposed through oil,” Green says. “A new strike on Iran could drive energy prices higher, revive inflation and push up government borrowing costs – just as bond markets are already under pressure.”

An opposition victory would not eliminate those risks. Both Netanyahu and Eisenkot have pledged to maintain pressure on Hamas and Iran. The main differences, Green says, would be in their tone, diplomatic approach and willingness to escalate.

Israel’s public finances are another concern. Defence spending is close to 8% of GDP, the highest proportion among Western economies. Netanyahu supports a 450 billion shekel military buildup over 12 years. The Bank of Israel has warned that the plan could push public debt towards 85% of GDP by 2035. Eisenkot has instead called for structural reforms, including bringing more ultra-Orthodox Israelis into military service and the workforce.

“Bond investors care deeply about who will pay for these commitments,” Green says. “Israeli government bonds have returned roughly 30% over the past two years – more than twice the gains of major emerging-market benchmarks. Preserving investor confidence depends on having a credible plan to cover the cost.”

The consequences could spread across the Middle East. Some investors believe a weakened Netanyahu government might ease regional tensions and support assets such as Lebanese bonds. A change in Israeli leadership could also revive discussions about normalising relations with Gulf states.

“The biggest election trade may be felt across the Middle East rather than in Tel Aviv,” Green says. “A calmer political climate in Israel could open the door to trade, energy and infrastructure deals across the region.”

International investors remain cautious. Foreign ownership of Israeli equities is at a record low, despite the market’s strong gains.

“Foreign investors have largely sat this rally out,” Green says. “A decisive result could encourage some of them to return. A messy one may keep them on the sidelines – and leave the risk of further conflict hanging over the market.”

Israel’s voters decide on Tuesday. Green says the result could shape energy prices, bond yields and investment portfolios for months.

“A clear result, whoever wins, gives markets something to work with,” he says. “A stalemate leaves the biggest decisions, including those involving Iran, unresolved.”

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