Israeli resilience tested as Iranian missile strikes hit home

Israel is currently engaged in a military conflict with Iran following a preemptive strike ordered by Prime Minister Netanyahu to dismantle Iran's nuclear program, resulting in retaliatory missile strikes and casualties on both sides. Despite the ongoing attacks and internal divisions, a recent poll indicates strong support among Israelis for the military action, with the shekel surging 3% against the dollar and the Tel Aviv stock market rising 2% amid investor optimism that the conflict will eliminate geopolitical risks and improve Israel's growth outlook.

Analysis

The military conflict initiated by Israel against Iran on June 13th, aimed at neutralizing Tehran's nuclear ambitions, has, despite causing anxiety and destruction, garnered significant domestic support, with a reported 70% of Israelis backing the operation according to an Agam Labs poll. This support persists even as nightly Iranian missile retaliations have resulted in 24 Israeli deaths, hundreds of injuries, and substantial property damage. Paradoxically, financial markets have reacted with pronounced optimism; the Israeli shekel experienced its largest daily percentage gain since at least 2008, appreciating over 3% against the dollar on Monday, while the Tel Aviv stock market rose 2%. This investor sentiment, characterized as "strongly positive" with a market impact score of 0.65, appears rooted in the expectation that a successful campaign against Iran could fundamentally reduce Israel's long-term geopolitical risk. As articulated by Jonathan Katz, chief economist at Leader Capital Markets, such an outcome is anticipated to lower the risk premium in Israel's bond market and foster a more positive growth outlook, despite the ongoing human cost and the flight of Tehran residents fearing escalation. The conflict represents a major conflagration, adding to existing tensions with Gaza, Lebanon, Syria, and Yemen.

Key Decisions for Investors

• Investors should acknowledge the current positive sentiment driving Israeli assets, such as the shekel and the Tel Aviv stock market, which is based on expectations of a significant reduction in geopolitical risk if Iran's nuclear threat is neutralized.
• Closely monitor developments in the Israel-Iran conflict, as market optimism is highly sensitive to the perceived success of Israel's military objectives and could reverse swiftly based on new information or further escalation.
• Evaluate exposure to Israeli markets considering the heightened volatility inherent in an active military conflict, balancing the potential long-term benefits of reduced geopolitical risk against the immediate uncertainties and substantial human costs involved.