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to pulling the plug quickly in this part of the world, did so yesterday without hesitation, as more than $1 billion was withdrawn from the market.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."

Naturally, Stefak says, in such situations investors flee toward the safe havens of government bonds and gold. "Roughly 30% of Israel's short-term debt is held by foreigners, much of which was cashed in since the Egyptian turmoil began," Stefak says. The Israeli shekel recently has been steadily weakening relative to the dollar, following a long period it which it strengthened relative to the greenback.

Various market commentators also raised the possibility that Israel will be forced to increase its security budget following any type of deterioration of its political relations with Egypt. After many years or relative calm at the southern front, such an event would mandate the issuance of more debt and thus increase the pressure on the shekel.

As in previous cases of geopolitical uncertainty in the area, the first "victims" were the Israeli bank stocks. Israel's banking Index fell about 4.5% during Sunday trading, as mostly large institutional foreign investors pulled out of stocks such as Bank Hapoalim and Bank Leumi. On Monday banks pulled up and closed 0.54% higher.

Other Israeli stocks hammered directly as a result of the Egyptian crises include Ampal-American Israel ( AMPL), which holds a 12.5% stake in Egypt's East Mediterranean Gas Co. The stock, which trades on both Israeli and U.S. markets, dropped by more than 10% on Friday in the U.S, and Sunday by over 17% in Tel Aviv on concerns that its $4 billion deal to supply gas to Israel over the next 20 years would now be jeopardized. On Monday, the stock fell another 2.5% in Tel Aviv.

One company that stands to profit from such a scenario is Noble Energy ( NBL), which operates the Tamar natural gas project offshore Israel. The Tamar project could potentially be awarded the second half of the gas supply deal (it was awarded half of it together with EMG), if the Israel-Egyptian partnership fails to fulfill its commitment to the State of Israel.

Delta Galil Industries an Israeli maker of lingerie, also fell Sunday after it announced that it would close its factory in Egypt. On Monday, the stock closed 2.7% higher in Tel Aviv trading.

Stocks of Israel Chemicals, the sixth largest potash producer in the world, also got battered Sunday following the Egyptian crisis, despite gains recorded by its peers Mosaic ( MOS) and Potash ( POT). On Monday, the stock regained some of the losses, closing 1.5% higher.

On the oil front, the situation in Egypt can potentially further affect oil priced, as the eruption of protests in the streets of Cairo caused a 4% spike in oil prices Friday. Although Egypt is not a major oil supplier, over 1.8 billion oil barrels travel every day through the Suez Canal, which is owned by Egypt, Stefak says. "Continuing uncertainty in the area will cause the oil tankers to fear sailing through the Suez, forcing them to surround Africa. A closing of the Canal could be a serious setback to the global economy," Stefak says.

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Elinor Arbel is a financial journalist based in Tel Aviv, Israel. She currently covers the Israeli mutual fund market for a leading Israeli newspaper and works as an editor at Israel Fund Observer, representatives of Morningstar in Israel. Prior to this, Elinor worked as an editor at Standard & Poor's in Israel. Elinor earned a graduate degree in Business Journalism from Baruch College, and while living in the U.S. covered the oil and gas markets for TheStreet.com.

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