Israel's Stock Market Braces for Big Vote

As Israel heads for elections on March 28, investors are wondering whether a political change will stoke or subdue its booming economy. Will the elections bring a dramatically different administration? Many in the local financial markets believe they won't, but market participants remain on the lookout as geopolitical threats loom in the region.

It is widely anticipated that Kadima, Ariel Sharon's newly established party now headed by Ehud Olmert, situated in the center of Israel's political map, will by itself win a majority of the votes and will be responsible for building a new, wide-coalition government.

One possibility is that the Likud, Benjamin Netanyahu's right-wing party, joins the coalition, together with smaller religious groups. Another is that Amir Peretz, head of the Labor Party, joins the coalition, accompanied by other left-wing and secular parties. It is also possible that both Netanyahu and Peretz join Kadima, though it is less likely.

One thing is for sure: Both Peretz and Netanyahu will want to be finance minister; the "socialist" (Peretz) and the "capitalist"(Netanyahu) will fight to shape Israel's socio-economic policies.

In the financial community, the tendency is to prefer Netanyahu's privatization and tax-cut strategy, which is said to have contributed to Israel's 5.2% GDP growth in 2005. But his right-wing stance with regard to the Palestinians will probably prevent him from winning the election.

"The Iranian threat, and the fact that Israel is not the only one facing a government change, but also the Palestinian authority is, with Hamas, are more critical to Israel's future than what party will end up winning," said Danny Farhi, head of institutional sales at Excellence Nessuah, an Israeli financial services firm.

"It is pretty obvious that Olmert will be the next prime minister," Farhi said. "He is going to have to prove himself by performing something along the lines of Sharon's unilateral withdrawal from Gaza. It will just take some time until it happens."