Thriving amid turbulence: How foreign investors reap rewards from Israel's volatile markets

The intersection of geopolitics and economics often results in unpredictable market dynamics, particularly in regions with frequent conflict. Israel’s wartime economy is a prime example. While many anticipated a stabilization of the Israeli stock market and currency following the ceasefire with Hezbollah, reality defied expectations. Instead of an immediate rally, the shekel weakened, and local indices faltered. Yet, amidst the turmoil, foreign investors – especially global banks – emerged as unexpected beneficiaries, leveraging volatility for significant gains.

Since the onset of hostilities in October 2023, Israel’s financial landscape has been marked by sharp fluctuations. For instance, the Tel Aviv 125 Index saw double-digit growth from early September, outpacing similar indices globally, despite earlier underperformance. Similarly, the shekel experienced erratic movement, initially plummeting past 4 shekels per dollar in the beginning of the war before rebounding to 3.64 shekels per dollar – one of the strongest performances against major global currencies.

These swings were amplified by strategic interventions from the Bank of Israel, which announced a $30 billion dollar-selling program to stabilize the shekel. The actual deployment of $8 billion shifted market sentiment and introduced fresh dynamics for currency traders.

Foreign Banks Turn Crisis into Opportunity

Global financial giants like JP Morgan, Goldman Sachs, and Citigroup were among the primary beneficiaries of this volatility. According to data from Vali Analytics, revenues from trading in Israeli assets - including bonds, currencies, and commodities – are projected to reach $475 million in 2024, a 10% increase from the previous year. JP Morgan alone is expected to earn $70 million from these trades, with Goldman Sachs and Citigroup not far behind.

Such earnings underscore how adept these institutions are at timing market movements. While local investors faced steep losses during the ceasefire’s aftermath, international players capitalized on price swings, executing trades that profited from both depreciation and recovery phases.

Israeli government bonds, both in shekels and dollars, also became focal points for foreign investors. The war-induced risk premium caused bond yields to spike – reaching a 13-year high of over 5% for 10-year shekel bonds - before easing to 4.47% as tensions stabilized. Investors who bought bonds during peak volatility are now reaping significant returns as yields declined and prices surged.

Foreign participation in the bond market has gradually recovered. While foreign entities held 15% of Israeli government bonds before the war, their share fell to 8.4% in mid-2023. By September, foreign holdings rebounded to 9.4%, signaling renewed confidence.

Foreign investors are also making a comeback in the stock market. After offloading over $3 billion worth of Israeli shares in previous quarters, they purchased nearly $1.5 billion in the third quarter of 2024. Foreign holdings now account for 20.4% of the Israeli stock market’s value – the highest level since January 2023.

As Israel’s markets stabilize, the long-term implications of this wartime trading boom remain to be seen. However, for now, the sharp volatility that often accompanies conflict has proven to be a lucrative opportunity for foreign investors willing to take calculated risks.

This article originally appeared here and is reposted with permission.