Israel Stocks Hit on Sharon Hospitalization

Shares are lower as the political picture gets cloudy.
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Stocks were falling in Tel Aviv Thursday after Prime Minister Ariel Sharon underwent emergency surgery to stop bleeding in his brain.

Sharon reportedly stabilized after a seven-hour surgery, although his condition remains critical. Local reports suggest the 77-year-old prime minister will be kept in a coma through Sunday after suffering his second stroke in less than three weeks.

Shares on the Tel Aviv Stock Exchange dropped more than 6% at the open in extremely heavy trading. Decliners included Bank Hapoalim, the nation's largest bank, which fell 7%, and Bank Leumi, the second largest bank, which lost 7.2%.

"This event injects tremendous uncertainty not only into the Israeli market but into the Middle East as a whole," said David Zwebner, portfolio manager and CEO of CommStock, a Jerusalem-based investment firm with $50 million under management.

"All the foreign cash that has been rushing into this market will be rushing out until the political situation regains its stability. "

Zwebner says he sold many of his Israeli holdings 10 days ago, saying the market was getting expensive independent of political considerations.

"I expect the market to come down some more, it was already too high," said Gilai Dolev, Tel Aviv-based stockbroker and owner of the high tech information firm Dolev & Abramovitch. "Much of the increases in the stock market this year were based on Sharon and his policy, but there are good reasons to believe his party and his heritage will continue since most of the Israeli public supports his way."

Uncertainty surrounds the near-term future of the Israeli government. Finance Minister and Sharon deputy Ehud Olmert was named acting prime minister, but many believe he lacks the political charisma needed to lead Sharon's newly established Kadima party.

Israeli elections are scheduled for March 28.

Stock markets tend to thrive in times of political and economic stability. And indeed, the Tel Aviv Stock Exchange had a phenomenal year. The TA-25 Index returned 36.2% this year and the TA-100 index surged 34%.

Foreign institutional money has been pouring into the Israeli market for the past two years, attracted by Israel's strengthening economy. In 2005, analysts estimate, a record $11 billion in foreign investment flowed into the country. With annual GDP growth of about 5.1%, negligible inflation and low interest rates, the Israeli emerging market has become an investment hot spot.

But political uncertainty supports the market bears, as seen by a 15% surge in the short derivatives TALI-Short.

Despite the declines, Israeli blue chips such as

Teva

(TEVA) - Get Report

,

Nice Systems

(NICE) - Get Report

and

Given Imaging

(GIVN)

, which trade on both the Israeli and New York markets, have shown resilience.

"For these companies, a pullback is seen as a buying opportunity," said Zwebner.