Netanyahu Gets Landslide in Markets Masking No Peace Process

Israeli Prime Minister Benjamin Netanyahu’s electoral opponents say he has presided over a deterioration of the Palestinian peace process, heightened tension with Iran, Egypt and Turkey and rising living costs.

For investors, he represents a more sanguine image: a world-beating bond rally and the shekel’s best advance under any government since at least 1984 as he fostered economic growth faster than in the U.S. and Europe.

“The world perceives Israel as a well-managed state that offers investors a good deal with high returns on solid investments,” Amir Gil, chief investment officer of Tel Aviv-based Psagot Provident Funds and Pension Ltd., which manages $16 billion of assets, said on Jan. 14. “If the new government will continue the existing economic policy, Israel will continue to be a good place to invest in compared to the world.”

Polls show Netanyahu is on course to prevail in voting tomorrow. While contender Tzipi Livni accused Netanyahu’s policy of abandoning talks with Palestinians as “leading to an end of the Jewish state,” investors say the 63-year-old deserves a second-straight term for his record on the economy.

Israel’s local bonds have rallied 36 percent in dollar terms since Netanyahu took office on March 31, 2009, compared with a 22 percent increase for a global index of government debt, data compiled by Bank of America Merrill Lynch show.

Doing Good

The shekel surged 13 percent versus the dollar, the second best-performing currency in the Europe, Middle East and Africa region. The benchmark stock index climbed 65 percent and hit a record 1,341.89 during Netanyahu’s term, in April 2011.

“Netanyahu was good for investors and will be good for investors,” Jerry Cutiesteanu, who helps manage 15 billion shekels ($4 billion) at I.B.I.-Israel Brokerage and Investments Ltd. in Tel Aviv, said in a telephone interview on Jan. 10. “Investors see he has a multi-year systematic policy of increasing competition in the economy.”

The returns mirror the achievements of U.S. President Barack Obama during his first term. The Dow Jones Industrial Average rallied 67 percent, among the biggest gains in the developed world, and U.S. bonds returned 27 percent, data compiled by Bloomberg show. The Standard & Poor’s 500 Index hit a five year-high last week ahead of Obama’s inauguration to a second term today.

Breaking Conglomerates

A graduate of the Massachusetts Institute of Technology and a former finance minister, Netanyahu built investor confidence by spurring competition in the telecommunications industry, curbing unemployment and taking steps to break up Israel’s conglomerates.

He also ensured Stanley Fischer, invited by then-Finance Minister Netanyahu in 2005 to take over as Bank of Israel governor, stayed in office for a second term by pushing a new central bank law through parliament, a condition Fischer gave for signing on for a second term.

Fischer, a former Citigroup Inc. vice-chairman and International Monetary Fund executive, helped Israel’s economy recover from the global financial crisis faster than most peers while keeping inflation in check.

Since 2009, the economy has expanded by 14.7 percent, compared with 3.2 percent in the U.S. and a contraction of 1.5 percent in the euro region, the Finance Ministry in Jerusalem said in a Jan. 1 report. The jobless rate in 2012 was 6.8 percent compared with 10.9 percent in the euro region, based on an average of quarterly data, the ministry said.

Testing Time

The rewards for investors mask some of the challenges facing Netanyahu should he win another term.

“The glare of the macroeconomic numbers instill investor confidence but do not tell the whole story,” Yaniv Pagot, chief strategist at the Ramat Gan-based Ayalon Group Ltd., said by telephone on Jan. 18. “This economic success has not trickled down to the average citizen.”

Last year’s economic growth of 3.3 percent was the slowest since 2009, while Israel has struggled to contain its finances because of shrinking tax revenue. Israel posted a budget deficit of 4.2 percent of gross domestic product in 2012, more than double the target, the Finance Ministry said on Jan. 13. While advancing during his term, the shekel has weakened 16 percent from its strongest level of 3.2268 reached in July 2008.

Foreign investment, which includes direct and portfolio investment, is also on the wane. Funds coming into the country slumped to $8 billion in 2011 from $18.2 billion in 2010, according to the central bank. In the first three quarters of 2012, foreign companies and investors pulled out a net $1.3 billion, the data show.

Less Support

Hundreds of thousands of demonstrators took to the streets in the summer of 2011 to protest the rising cost of food and housing, setting up encampments in Tel Aviv and Jerusalem.

Last year, housing prices rose 5.7 percent, while food increased by 4 percent and electricity by 9 percent, according Jerusalem’s Central Bureau of Statistics data. Annual inflation declined to 1.6 percent in December from 3.6 percent in March 2009, when Netanyahu took office, and after hitting a peak of 4.3 percent in March 2011, the statistics office said.

Netanyahu, who raised taxes last year to boost revenue, called early elections for Jan. 22 after failing to reach an agreement with coalition parties regarding spending cuts to reduce the 2013 budget.

While he’s the frontrunner, polls show falling support for his Likud-Beitenu parliamentary list, which would emerge with fewer seats than it currently holds. Such an outcome would increase his dependence on smaller groups with other priorities, making it harder to form a coalition.

More Cutting

Netanyahu must reduce the budget deficit, cut red tape for businesses and strive for peace in the region following the conflict with Gaza in November, Gil at Psagot said.

“Investors believe in the economic policy and we can see that in continued strength of the shekel against the dollar,” Ronen Matmon, the investment chief at Excellence Nessuah Gemel and Pension Ltd., which looks after 20 billion shekels for clients, said by phone on Jan. 15 from Ramat Gan. “The next government will have to cut expenses and raise taxes.”

The last poll allowed by law before voting showed Netanyahu’s combined Likud-Beitenu parliamentary list will win 32 seats in the 120-seat Knesset, according to the results published in the Yediot Ahronot daily on Jan. 18. The list will garner 35 seats, according to a survey in the Maariv daily.

Record Bonds

Yields on benchmark 10-year government bonds were at 4.04 percent in Tel Aviv today, after reaching a record low of 3.85 percent on Dec. 31. The shekel soared 5 percent in the fourth quarter of last year, the best performer among the 31 major currencies tracked by Bloomberg. The cost of protecting Israeli government debt against non-payment through five-year credit-default swaps reached a year-low on Jan. 14, and rose two basis points, or 0.02 percentage point, to 124 today.

Netanyahu, nicknamed “Bibi” in Israel, won over investors when he was finance minister from 2003 to 2005, selling state-owned companies, cutting transfer payments and undertaking to restore the economy from the damages of the second Palestinian uprising that started in 2000.

Under his premiership, his second after a stint in the late 1990s, Netanyahu made further changes.

An inter-ministerial committee submitted its recommendations last year that companies should reduce cross-holdings in financial and industrial businesses. The government has also freed land for housing development and has taken steps to increase competition in the banking and food industries to meet the public’s outcry for lower living costs.

Higher Subsidies

Netanyahu’s government boosted subsidies for the high tech industry, luring New York-based Citigroup to establish a research center in the country and Santa Clara, California-based Intel Corp., the world’s biggest maker of semiconductors, to expand its operations in Israel.

The Finance Ministry says growth will pick up this year as companies, including Delek Drilling LP and Avner Oil Exploration LLP, start extracting natural gas from Mediterranean fields and budget cuts help the economy’s longer-term prospects. GDP will expand 3.8 percent this year, according to the central bank.

“As investors we saw positive returns on our investments in Israel because of his good fiscal policy,” said Matmon, the fund manager at Excellence. “The elections were called on the background of the budget deficit. As an investor I know that things are in control.”

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