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Israeli Stock Market Wary of Egypt Crisis

TEL AVIV, Israel ( TheStreet) -- While many assume that the short-term impact of the turmoil in Egypt on Israel is likely to be minor -- whether President Hosni Mubarak remains in power or whether the country eventually goes through a regime change following a civilian uprising -- concerns of a domino effect loom.

Investors in Israel's stock market continue to anxiously monitor the political unrest in Egypt, its bordering neighbor to the south and a country with which it has had a frosty peace relationship for the past 30 years.

The Israeli stock market has had an incredible run during the past two years, rising 88% and 15% in 2009 and 2010, respectively, fueled by robust economic fundamentals, a stable and capital-rich banking system and high productivity rates.

Recent discoveries of large offshore natural gas deposits in Israeli territorial waters also have supported the upward momentum of the market. Still, geopolitical tensions remain a major obstacle.

On Sunday, Israel's major stock index, the Tel Aviv 100, which includes major Israeli companies such as Teva Pharmaceuticals (TEVA), fell 4% after fears that the situation in Egypt will destabilize the entire Middle East. At the close of trading Monday, major Israeli equity indexes closed higher, as the Tel Aviv 100 index rose 0.91%. The Egyptian stock market remained closed.

Foreign investors, who are accustomed to pulling the plug quickly in this part of the world, did so yesterday without hesitation, as more than $1 billion was withdrawn from the market. Israel's entire GDP in 2010 was roughly $217 billion.

"The question people are asking themselves is will this trend expand into other countries, just as it did from Tunisia to Egypt," said Zvi Stefak, chairman of Meitav Investment House, one of Israel's largest asset management firms in an interview. "Israel's economy would be directly affected if other Islamic nations follow Egypt in toppling their authoritarian governments. We have Libya as one candidate, with Muammar Al-Gaddafi's relentless rule, as well as Morocco and Algeria, both significant oil-producing nations. Jordan, a country with which Israel has a very long border, is less a concern since the king is very much admired, though a large Palestinian majority in the country opposes the government."

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